What is Transferable Value and How to Maximize It
One of the most important elements of a successful business transition is the transfer of value. What the current owner sees as the future of the business matters little to a new owner unless specific intrinsic characteristics of the business can be transferred in order to make those goals more achievable.
Defining Transferable Value
Transferable Value, for small to mid-sized privately owned businesses, is simply what a business is worth to someone else without its original owner. It has little to nothing to do with the profitability of the business. Even though your company may generate millions of dollars of revenue and significant profits each year, it does not necessarily follow that it has transferable value. At the end of the day, it is not simply how well your business runs when you are there, but rather how well it performs when you are not there.
Transferable Value is not a formula involving multiples of EBITDA, earnings or a calculation of discounted future cash flows, it is rather a combination of tangible and intangible drivers that create that value.
What Drives Value?
There are a number of value drivers in any business, some of which may not pertain to your business, but all businesses will employ some if not all of them. Owners should examine the value drivers of their business to assess whether adding new ones and/or enhancing existing ones would assist in transitioning the business to a new owner with minimal disruption to cash flow. Below are a number of value drivers that all business owners should consider.
· Management Hierarchy – Build a management team that has the ability to run all aspects of the business effectively and efficiently and incentivize them to succeed. This is invaluable to a new owner.
· Formalized Operational Structure – Formalize in writing all aspects of the business. Detail who does what, when, where, how and why.
· Strong & Diverse Customer Base – Strong customers make for a strong business and a non-concentrated, diverse customer base eliminates concentration risk where one or two large customers can destroy a business.
· Growth Strategy - Have a growth strategy that not only proves the future viability of the business but has a proven track record of success.
· Cash Flow & Balance Sheet Management – Cash Flow is the life blood of any business, no business can survive for long without it, manage it as if your life depended on it.
· Scalability – Scalability is sometimes confused with growth, but scalability is actually the functional, financial and operational capability to implement your growth strategy.
· Competitive Advantage – What makes your product or service superior to all of your customer’s choices. Identify the benefits you provide, know your target market and know your competition.
· Recurring Revenues – While not every product or service will generate those predictable and stable recurring revenues, the key is to maximize those that do and maintain high retention rates.
To evaluate the effectiveness of value drivers, business owners should determine how each of them impacts cash flow, margins and profitability and should keep in mind that acquisition multiples that drive the final sale price are higher for a business that has strong drivers than one with weak or non-existent ones.