What is your company’s value? This is a key question for any business owner who intends to sell his business at some point in the future. It may seem like there should be a simple answer to this question, but value is actually a complex issue. The value of the business to the owner can differ radically from the value of the business to a prospective investor. If an owner’s goal is exit readiness, he should be steadily working to make sure that his company’s transferable value is optimized.
The Company’s Value to the Owner
It can be challenging for an owner to judge the value of his own business. This is because it’s likely that the business has real personal value to him. There are plenty of reasons why the business can be important to an owner, including:
Personal history – For an owner who built a company up from the ground, he naturally will associate his life and key moments of his life with the business. It’s so integral to his life that he may have a hard time separating himself from it. This can also be the case with a family business, especially when the company’s history is intertwined with family history and fortune.
Power and prestige – Many owners come to appreciate being in a position to make things happen. This can be true both in the company and in their communities. Their sense of self may depend on being a person of power and influence, and, as such, they may dread selling and leaving their positions.
Money – While the goal of any business exit to to ensure financial security for the owner going forward, many owners know that they will experience a drop in their standard of living when they exit their companies. In order to maintain a comfortable lifestyle, they may feel they have to keep working. The business then represents personal prosperity and comfort to them.
Unique gifts or talents – Many businesses run as well as they do because their owners are unique. They may be very charismatic, great at networking and pulling in customers, or tremendously talented in other ways. For this type of owner, work represents an opportunity to shine. Unfortunately, in terms of the company’s value to prospective buyers, a one-of-a-kind owner represents a real risk to the company’s operation when that owner exits.
To many owners the opportunity to build and run their companies is priceless. This view of value isn’t helpful, however, when it comes time to sell.
Transferable Value
What is transferable value? To prospective buyers, transferable value is the value of the business minus its owner. When the owner is no longer a part of the business, how well does it run? What kind of a profit can it expect to make minus his talents and leadership? These are the questions any investor will ask.
The goal of an exit planning advisor is to help a business owner determine what his company is worth and increase its transferable value so that when it comes time to sell, there will be considerable interest from buyers and the owner will receive good offers. So what affects transferable value?
Primarily, investors want to buy businesses that are both consistently profitable and low risk. They want to see good and improving cash flow. They like companies that have strategies in place for growth. A large and diversified customer base is a huge asset. They also need to see competent management that will continue on with the company after a transition.
If the business is too owner dependent, it will flounder and fail when the owner is no longer there. That means that well before any exit, the owner needs to put into place a good management team who will be able to run the company according to established policies and procedures without him. Putting together a good management team is a challenge, and finding a way to keep key management in place over time and through a transition is even more of a challenge.
Owners who are, as described above, unique assets, need to find a way to replace themselves, even if they have to hire several people to do so. When buyers see a well run company that is profitable over time, has a plan in place for growth, and has policies and procedures in place that allow stability even in the event of management change, they feel less like they are taking on a risky venture and more like the business is a great opportunity to invest in.
“Build transferable value” should be the mantra of any owner looking down the road at a sale. There are many strategies to accomplish this, but it does take time, effort, and focus. Furthermore, owners need to look at their companies as objectively possible, beyond their own personal involvement, if they are to understand it’s true value to others. If you would like to talk about your company’s value and the steps you should take to increase it, please contact Prometis Partners. We would be happy to talk to you about how you can work to increase its transferable value.
