Owner-Operator

A business owner who personally works in the business full time, rather than employing a manager to run day-to-day operations on their behalf.

Example

A bakery owner who opens the ovens herself each morning and does the books on Sundays is an owner-operator, not a passive investor.

Important

Most small-business earnings figures below one to two million in price assume an owner-operator's unpaid labour, which is why the reported earnings and the pure capital return on the price are two different numbers.

Related terms

  • Key-Person Risk — The risk that a business's earnings depend heavily on one specific individual's relationships, judgement or reputation, and will not survive their departure intact.
  • Semi-Absentee Ownership — A business ownership structure in which day-to-day operations are run by a paid manager rather than the owner personally, with the owner involved only periodically.
  • Seller's Discretionary Earnings (SDE) — A reconstructed measure of a small business's earnings that starts from reported net income and adds back the owner's salary and other discretionary or non-recurring items, used to price owner-operated businesses.

Lessons that explain it

  • Buying a small business almost always means buying a job — A small-business purchase is rarely a passive claim on cash flow. Most of what you are paying for is bound up with the seller's own labour, and the legal structure of the deal decides which liabilities move with it. (9 min)
  • The multiple is a discount for size, concentration and dependence on one person — There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business. (11 min)
  • This asset class replaces an income, it does not just diversify a portfolio — Small-business ownership belongs alongside the decision to work rather than alongside a bond allocation - it is concentrated, illiquid and labour-intensive by nature, and pretending otherwise is how it ends up compared against the wrong alternative. (9 min)

All 578 terms in the Investing glossary