What is Passive Ownership?
Passive ownership refers to any shareholder in a business that is not involved in the day-to-day decision making of the company’s operations. The shareholders may be involved in some high level corporate decisions that require shareholder votes, but never in daily operating decisions.
Passive ownership mostly occurs when the owners have built a stable business and have efficient managers running the business. It allows them to get out of the day-to-day operations of the business and make themselves operationally irrelevant to the daily running of the company. The only input that the owners are required to provide is in making strategic decisions with regards to the critical decisions of the company and capital-intensive operations.
Why business owners consider passive ownership?
Many business owners are getting attracted to passive ownership because it gives them an opportunity to get involved in other activities that they enjoy outside the business and still enjoy higher profits from the company. Here are a few reasons why business owners prefer passive ownership:
Business will be more efficient
Creating passive ownership starts by having the right systems in place to solve any problems that may arise. The systems include having reliable technology systems, customer service and competent managers who can make decisions on their own. The latter is most important since the managers will know what to do at specific times as long they know they have your backing as the business owner.
The business owner should also put in place an elaborate compensation system that motivates and keeps the managers in place. Also, once the owner delegates important responsibilities to key employees, the employer should not meddle in their responsibilities but instead support them even when they make mistakes.
Focus more on strategies rather than operations
Engaging in the daily activities of the business means that the owner will lack time to participate in strategic goals that will define the operations of the business. Business owners should learn to trust that their subordinates can take care of the business operations on their own.
Spending too much time worrying about the day-to-day operations of the business may blur the big picture that the owners have about the future of the business. Focusing less on operations leaves more brain power to focus on strategic issues like new markets to venture in, how to grow the revenue, strategic acquisitions and probably plan the exit.
Makes business more attractive to buyers
When buyers are contemplating acquiring new businesses, they consider their ability to run the business smoothly after the acquisition and continue generating revenues better than the original owners. Once the owners make themselves operationally irrelevant to the business, they demonstrate to potential buyers that the business can keep operating without the direct involvement of the owner.
However, if a business owner is in charge of critical functions of the company, it can be difficult to convince new owners that the business will continue operating smoothly after the acquisition. Potential business owners prefer acquiring businesses that can continue running smoothly without their direct involvement.
Easy to track the progress of the business
A business owner moving towards passive ownership will need to develop a financial reporting system that allows them to know what is going on in the business even when they are far away. The financial management system should provide real-time reporting of events so that the business owner can know when urgent action is needed to prevent the business from incurring losses.
Benefits of passive ownership
Passive ownership offers the following benefits:
Time to plan after-retirement life
Owners of private businesses often spend most of their time getting involved in the daily operations of the business. However, as they near retirement, they become less productive as they stress what they will be doing after exiting the company.
Passive ownership offers a smooth transition from a workaholic life to an easy schedule that will help the owners transition into retirement with ease. It allows them to concentrate on more important issues like growth, new acquisitions, the sale of the business or transitioning the business to the next generation. All the strategic issues require more mental energy to plan rather than the daily involvement that the owners have been used to.
Opportunity to pursue other interesting activities
Busy business owners often lack time to pursue activities and opportunities that interest them outside the business. The activities may include tailgating, charitable giving, visiting overseas countries, spending time with the family and engaging in outdoor games like golf. While actively running the business, the owners rarely find time to indulge in outside activities that will help them restore their energy and create new hobbies.
Sometimes, moving away from the business helps managers focus on their core functions without worrying that their work will be interrupted by the business owner. It increases employee productivity, and the business may experience increased revenue and growth when the owners become operationally irrelevant.
Business owners who are directly involved in the operations of a business often face difficulties delegating responsibilities to their employees. Most of the times, the owners find themselves meddling in the responsibilities they have entrusted to the employees. Also, the owners cannot stand the employees making mistakes while they watch.
However, with passive ownership, the owner will be forced to delegate all the activities they carry out in the business to employees who excel in specific areas. The proper delegation of tasks will also increase efficiency in the operations of the business since employees get better when they do the same thing over and over again.
Moving toward passive ownership allows the business owner to tap into skills of other people in the business. In such manner, the employees handle functions that they are trained in and are more comfortable with. When employees engage in activities that they love and are experienced in, it results in increased efficiency of operations and hence, increased revenues.
The owner’s focus on strategic rather than operational activities allows the business to tap into more ways of growing revenues by introducing more products, venturing into new markets, and expanding the customer base.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: