Have you ever worked with a business owner that is the head salesperson, primary customer service rep, office manager, accountant, and janitor? Many small business owners have to wear many hats to be sure their business survives and eventually thrives. However, it can be difficult for some owners to pass along those important responsibilities to others in the workplace. As an advisor, it is your role to remind clients that they need to delegate their responsibilities to other key employees in order for a business to build transferable value.
Building Transferable Value
Transferable value is what your owner client’s business is worth, to someone else, without them in the business. Owners have to learn how to spread out their responsibilities to key employees to make the business run more efficiently during an ownership transition. Many small business owners try to manage all aspects of the business rendering the business worthless to the new owner. Taking the time to focus on a few of these critical Value Drivers should greatly enhance the business's transferable value and the overall transition process.
Common Value Drivers that Influence Transferable Value
A company with strong Value Drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average Value Drivers. Value Drivers are specific business characteristics that drive growth. While each business is unique, there are nine characteristics that sophisticated buyers (e.g., private equity firms) look for when evaluating business value.
Next-level management appears first because it is the most important Value Driver. The others are ordered by how likely they are to affect business value, according to BEI Members.
Next-level management is the mother of all Value Drivers. The management team your clients start to build today will be the team overseeing the growth of the business and in the other areas that drive value for the business. Not only do your clients have to attract and hire this management team, but then they must also retain them through the transition of ownership. This can be accomplished through well-thought-out incentive plans.
This is not to say that your client’s current management team couldn’t bridge the gap between where the owner currently is and where they need to be to sell. With proper training and incentives, the current team in place could be the trusted team to help achieve your client’s business goals.
Operating Systems Demonstrated to Increase Cash Flow Sustainability
The establishment and documentation of standard business procedures and systems demonstrate to potential buyers that a business can maintain profitability after the sale and after the original owner leaves.
Could your client’s company improve its profit margins if it increased its revenue? This could be more difficult for certain businesses but not impossible. Brainstorm with your owner clients on potential avenues.
Diversified Customer Base
Potential buyers typically look for a customer base in which no single client accounts for more than 10% of total sales. The company could be considered a high-risk investment if a few of the top customers generate more than 40% of the company’s overall revenue.
Proven Growth Strategy
Developing a growth strategy helps attract potential buyers. A growth strategy could consist of the development of new product lines or augmenting existing ones, market plans, growth through the acquisition of other companies, expansion into new territories, or increasing manufacturing capabilities.
Recurring Revenue That is Sustainable and Resistant to Commoditization
It goes without saying that sustainable recurring revenue is a highly valued driver for any buyer. Having pricing margins resistant to commoditization is another significant opportunity for business owners.
Good and Improving Cash Flow
Help your business owner clients think of creative ways to improve cash flow in their business today. Simply offer ways to operate the business more efficiently: increase productivity and decrease costs. This Value Driver alone may not allow your owner client to achieve their objectives, but it’s an easy place to start. The success of this Value Driver heavily depends on the operation of the other Value Drivers you choose to focus on with your clients.
Competitive advantage is the product or service that a company offers that is better or cheaper than its competitor. Find out why your client’s customers buy from them instead of their competitors and publicize this.
Financial Foresight and Controls
Many companies lack reliable financial reporting to the extent that buyers can’t determine what the company has or track the source of its revenue. This problem can typically be corrected, but not overnight. Additionally, sloppy financial reporting could indicate other underlying problems to a potential buyer, increasing the risk of the sale.
Another factor that plays a part is that without proper forecasting, the current stakeholders, key employees, management team, original owner, and new owner have very limited insights into the strategic growth plan.
Start Planning Today
Rome was not built in a day, nor is transferable value. Review some of these Value Drivers with your business owner clients and find out what is most important to them. The sooner you start these conversations on creating and growing transferable value with your business owner clients, the better.Follow us on LinkedIn, Facebook, and Twitter to stay up to date on all current Exit Planning news and trends.