8 ways to create transferable value for your business
Are you thinking about selling your business? Most often business owners are confused when an investor or broker informs them there is worth much less than they think it is.
Here’s why. There is the value of the business while still in the hands of the existing owner and then there is the transferable value…the value of the business after the existing owner is long gone.
For many, the term ‘transferable value’ is a new term. Simply put, transferable value is what your business is worth to someone else without you. It is the value that you have created that be sustained after you exit the business.
As a business owner hoping to receive top value (or even fair market value) – as many business owners you most likely need to change the way you operate your business to create a successful exit strategy.
Ideally, you want to create a business that can operate without you being involved in the day-to-day operations as this is going to create a great deal of interest for a potential buyer.
Creating and employing a Business Operating System (BOS) is your company's unique way of doing things. It provides all of the minute details for — how it operates, goes to market, produces and deals with its customers. An effective BOS transcends the people who are doing and managing the work and is more valuable as a result.
A business that effectively operates without you is always more attractive to perspective buyers.
Unfortunately, many owners of successful businesses “do the heavy lifting” up until they want out only to find there is no one sufficiently qualified to run the company. Or, they have identified and trained the right candidates, but they assumed (wrongly) that their key people will stay on with the new owner after the sale.
Potential buyers understand the significance of having competent management intact that will continue to grow the business after you depart. Think about it, why would a buyer want to purchase the business from you (the seller) if they even have a hunch that the business will decline after you leave?
Management teams, systems and procedures are valuable because they are not easy to assemble. If a good team is in place and motivated to stay on and continue to grow the company the prospects will look good for continued success.
For buyers, there is a direct connection between the existing team and future cash flow projection. When buyers evaluate this risk, they will want to see that future cash flows will at least match, preferable exceed historical results.
As you work with your business adviser, CPA and attorney to design and implement a successful exit plan, consider the following ways you can begin to create transferable value in your business:
- Identify who your key people are, their skill sets and level of competency. (Hint: key people tend to think and act like owners).
- Analyze your level of involvement in the business and areas that management are/are not involved. You want to ensure that you have a business that can operate without you.
- Operating Systems and Procedures. The establishment and documentation of all business procedures, roles and accountability systems demonstrate that the business can be maintained profitably after the sale. Repeatable and teachable operating procedures ensure the business is successful without being reliant on any one person.
- Stable and Predictable Cash Flow. Consider revenue and the net cash flow of your business as the first introduction to a buyer. Revenue and cash flow is the number one attraction. A business with an established pattern of growth will bring a premium price when it is sold. Making recurring revenues comprise a material portion of a company’s overall revenues, the recurring revenue will be valued at a higher level than non-recurring revenues.
- Diverse Customer Base. Buyers typically look for a customer base in which no single client accounts for more than 8-10% of total sales. A diversified customer base insulates your company from the loss of a major customer.
- Growth Potential. When an owner can describe realistic opportunities for growth that specifically illustrate the reasons why cash flow and the business itself will grow after it is acquired, a higher value can be achieved. A documented growth plan demonstrates the viability of the company’s future and may identify opportunities that a buyer had not considered.
- Competitive Advantage. Your company’s competitive advantage is the reason your customers buy from you instead of from your competitors. You may well know your company’s competitive advantage if you have one. If your company does not, you are competing on price alone and this will need to be corrected to be considered by a buyer.
- Reliable Financial Information. Many companies lack reliable financial reporting and Key Performance Indicators (KPI's) to such an extent that buyers can’t determine what the company has or track the source of its revenue streams. For example, asking a business owner where their sources of new clients come – and they can’t answer the questions or break down the metrics so it makes sense to a potential buyer.
These eight steps can help you increase the transferable value of your business.
Create a Business That Can Thrive Without You
You have worked hard to build your business and make it what it is today. It is essential to seek professional advice and support to maximize your return when you sell your business.
Author - Joe Griffith
I've been consulting with clients since the 90's in various capacities. I launched my first start-up when I was 25 years old. I since built and sold 4 start-up business since then. It's only been in the last 8 years that business owners have paid me to develop systems and procedures for their business.