Simply put, transferable value is what your business is worth to someone else without you. It is the value that you have created that can sustain itself long after you depart.
If you are a business owner hoping to receive top dollar (or even fair market value) you must change your relationship with your business if you want to position yourself in the best place to exit successfully.
This does not mean you should stop being involved in the day-to-day operations, but it does mean that you must identify, properly train, motivate and retain competent management to run your business without you.
Unfortunately, many owners of successful businesses “do the heavy lifting” up until they want out only to find there is no one sufficiently trained or 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.
Sophisticated buyers and their advisors 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 are valuable because they are not easy to assemble and even more difficult to keep together. If a good management 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 correlation between the existing management 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.
A central element to this will be whether management is able, and willing, to grow the business. Simply put, the stronger the management team the higher the price. In other words, transferable value is the difference between what your business is worth on paper and what it is actually worth to someone else.
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.
- Create an honest assessment of the stronger and weaker sides of your business and create a plan for delegation to your management team.
- Implement a timeline for delegation of tasks – who will do what and by when, including you the owner.
- Consider performance-based incentives (short-term and/or long-term) that will motivate management to not only improve business value but remain with the business after your sell. Retention is often accomplished through meaningful incentives tied to a vesting schedule and strong forfeiture provisions.
- Communicate. Make sure you and your management team are on the same page with not only the timeline for delegation of tasks, but the creation of a realistic growth strategy.
- Document. Make sure your progress is being documented and your growth strategy is reviewed regularly.
- Seek counsel. Meet with your team of advisors regularly to review and update your plan as necessary.
These eight steps can help you to create notable transferable value.