When we first met James he owned a highly-profitable niche manufacturing business. Gross profits were high and he had low overhead. James’ top four employees ran the business with little input. James frequently traveled for a month, came back for a week and then left again for another month. Business was good, and he was increasingly interested in selling.
We discussed his business and its many attractive attributes. But when the conversation turned to his key people, James said, “Well, that may be a problem.” I was surprised. Clearly his employees were running his business without James.
“They do run the business,” he confirmed. “But without me they might kill each other. They don’t get along. When I get back from trips I spend the first few days doing nothing but resolving conflicts. If I were totally gone, several of them might quit. It’s not that I’m greatest guy in the world, but I am the glue that holds them together.”
Many Outies (business owners who intend to exit by selling their company) dream that one day someone will walk in, drop a large check on the desk and tell them to hit the beach or break out the golf clubs. Unfortunately, it doesn’t usually work that way.
Selling a closely-held business, even a good business, is a challenge. Too many owners reach their ideal exit age only to realize they have made a massive mistake – they allowed their business to become more valuable to them than to anyone else. In other words, the business’s value is not easily or fully transferable to another party. If a potential buyer perceives that your business’s value cannot be safely and cost-effectively transferred, then that party is not likely to write a significant check.
Let’s consider some examples. If you are the business’s most key employee, transferable value is undermined. If your business’s highly efficient operations are not documented, it will be difficult for a buyer to cost-effectively leverage those operations. If your long-term customers have always done business on just a handshake without formal contracts or agreements, it’s harder for a buyer to transfer these relationships. If your strong financial results are not reflected in financial statements that a buyer can readily understand, we’ve undermined transferable value. Building transferable value may require growing your business in a different manner.
There are certain conditions that enhance a business’s transferable value. We call these Enhancers. Most Enhancers do not immediately increase revenues or profits, although over time they often will. Enhancers increase transferable value by reducing potential risk for the buyer. Buyers want to know not only what your business has accomplished, but also how the business accomplished those results. The more confidence a potential buyer has in how your business works, the less a buyer will fear the business will falter after your exit.
