One Thing to Do Right Now: Create Transferrable ValueSubmitted by Business Owner Succession Strategies on March 11th, 2021
Many business owners talk about their business profit and the value of the firm. There is this idea out there that if you have profit, a business would sell for some multiple of that profit. Sounds simple, right? If this were universally true, however, then all businesses would expect to sell when the owner was ready to exit the business. Alas, that is not the case! In fact, many businesses – even those with profits – do not sell. Why not? Because those businesses do not have transferrable value.
“Transferrable value” might simply be the price that someone is willing to pay for a business that runs without the owner. In other words, how well does the business run (and how much cash flow is produced) WITHOUT the owner?
I often explain to our exit planning clients that we want to put your business in a box, clean it all up, wrap it up nicely with a bow, and reach in and pull the owner out of the box. Can the box run without the work of the owner?
A business owner who simply owns a business that produces cash flow…now, THAT is something that has a good chance of transferring. If the owner is doing the work of the business, though, THAT is seen as a risk. In this situation, a new owner has to understand not only what the old owner did, but also has to absorb the knowledge they had, the experience they’ve gained, and inherit the relationships they’ve created. In that case, there is little interest in buying the business. Thus, despite profits, there is no transferrable value if nobody is willing to buy the business.
An important part of a business owner’s exit plan should be to create and build transferrable value. How can this be done? Well, it is a deliberate process that usually takes time to implement.
I remember making chili a couple of times. One time I made it really quickly; I still used all the same ingredients as I normally do, but it wasn’t the same – something was missing. Another time, I cooked it slowly and took my time. The difference was that the spice and heat was deeply embedded and produced a rich satisfying taste. The flavor of the quick batch, in comparison, was more superficial and temporary. I think of businesses in the same way. You can’t just simply throw together the ingredients on transferrable value; you need to cook it slowly and deliberately, adjusting it and tweaking it along the way.
One way a business owner can know if they have a good system in place is to leave and watch what happens. Can the business run without the owner if they took an extended three-month vacation? Do leads still come in, are the leads developed, converted, onboarded, serviced, invoiced, and money received all without the owner’s involvement? Does the management team have systems and processes that are documented and in place that are repeatable? Do you have the right people in the right seats?
The essence of transferrable value? Creating a business that produces repeatable and recurring cash flow without the business owner’s direct involvement. The business owner is often a visionary for the company. A business owner who stays in their lane, being the visionary, creating culture, surrounding themselves with the right people, producing a repeatable system of recurring revenue – that is transferrable value.
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