The value of a transferable company: What is it and how to increase it?
Many business owners operate under the old thinking that once "their time comes" in their company, it is time to sell the business for profit. However, when it comes time to do just that, owners often get lost when it comes to creating and implementing a business transfer process. There are several methods to transfer a company and choosing one depends on the needs and plans of the owner, the market, and the structure of your business.
Transferable value is simply what a business is worth to someone else without its original owner. The transferable value should not be confused with profit. Just because a company generates millions of dollars in profits each year doesn't necessarily mean it has transferable value. The true transferable value in a business is not determined by how well you run it, but by how well it functions without you.
Business owners are not always aware that transferable value is more than a formula involving profits or some calculation of discounted future cash flows. To get a more accurate representation of the current state of your company's transferable value, you can start by asking yourself:
1.) If you leave your business permanently today, would you continue with minimal disruption to your cash flow?
2.) Who will be responsible for running the business without you and with minimal cash flow disruption?
One way to start generating transferable value is to evaluate your value generators. These can help create a business that can be transferred to someone else (either the next generation of families or an external third party), without the owner, with minimal disruption to your cash flow. Some examples of value drivers you may need to focus on are:
High-level management team
An operating model that increases the sustainability of cash flows
A diversified customer base
Proven growth strategy
Good cash flow
Financial projections and controls
Creating a management team with whom you can leave your company with confidence can be challenging. You may want to create a loyal all-star management team that maintains the value of your business and is as motivated as you are to grow the business. Also, understanding where your company may have weaknesses is an important step in knowing the type of person you'll need to attract to help fill in the gaps.
In general, when it comes to ensuring the business owner's financial security, there are clear advantages to business transfers. These include the ability to fund your retirement while maintaining control, the time element and potential for financial optimization, the importance of leaving a personal and business legacy, and the health and longevity of your company.