IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Allan VanderHamm of Berntson Porter & Company, PLLC (www.bpcpa.com).
Where Transferable Value Comes From
One of the most important elements of a successful business transition is transferable value. No matter what an owner sees for the future of the business, transferable value can be the common denominator that makes all goals more achievable.
What is Transferable Value
Transferable value, for a closely-held business, is most simply what a business is worth to someone else without its original owner. Transferable value should not be confused with profit. Just because your company brings in millions of dollars of profit each year, does not necessarily mean it has transferable value. True transferable value in a business is determined not by how well you run the business, but by how well the business runs without you.
Business owners aren’t always aware that transferable value is more than a formula involving multiples of earnings 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 a few questions:
- If you permanently leave your business today, would it continue with minimal disruption to its cash flow?
- Who will be responsible for running the business without you—and with minimal disruption to cash flow?
One way to start to build transferable value is to evaluate your value drivers. Installing and enhancing value drivers can help create a company that can be transferred to someone else (whether that’s the next generation of family members or an outside third-party buyer)—without the owner—with minimal disruption to its cash flow. Some examples of value drivers that you may need to focus on are:
- Next-Level Management
- Operating Systems Demonstrated to Increase the Sustainability of Cash Flows
- Diversified Customer Base
- Proven Growth Strategy
- Recurring Revenue That Is Sustainable and Resistant to Commoditization
- Good and Improving Cash Flow
- Demonstrated Scalability
- Competitive Advantage
- Financial Foresight and Controls
One might measure the effectiveness of value drivers in two ways:
- Their positive contribution to cash flow.
- Their ability to continue to contribute to cash flow under new ownership.
A company with strong value drivers might demand (and receive) a higher multiple on the same amount of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) than a company with weak or non-existent value drivers.
Build Transferable Value with Your Management Team
Building a management team that you can confidently leave your company with can be challenging. You may want to create a loyal “next-level” management team that will not only maintain the value of your business but is just as motivated as you are to grow the business to new heights. Understanding where your company may have weaknesses is an important step in knowing the type of person you will need to attract to help fill the gaps. It’s worth it to ask yourself whether you are focusing on attracting people with the skill sets the company needs to accomplish growth independently from the efforts and resources of the current owners. Establishing this highly qualified team long before you are thinking you’ll transfer the can give them the time and space to prove their ability to perform.
Attracting the right team is the first step, retaining the team long after your departure is the real task. To hold onto these vital team members, they may require more money or some percent of ownership as a condition of employment. Creating an effective incentive plan that fits the needs of your team is the best way to ensure your management team stays in place and continues to increase business value after your departure.
Ask Yourself: Do you want…
- More financial security?
- Better control over your business?
- Freedom and flexibility to do what you want?
- A stronger personal legacy?
- Fewer operating problems?
If you answered “Yes!” to any of these, we can help you! Our proven process includes business value improvement, personal wealth planning, ownership transition planning, and estate planning. And we can start wherever you are now to focus on your specific goals.
Allan VanderHamm, CPA, ABV, CVA, CM&AA, CExP, is a Principal and the Director of Business Transition and Valuation Services at Berntson Porter & Company, PLLC, a consulting and planning CPA firm in Bellevue, Washington. Allan’s practice focuses on designing and implementing comprehensive owner exit plans, completing successful merger and acquisition transactions, and preparing effective business valuations. If you have questions about the content of this article or any area relevant to Mr. VanderHamm’s expertise please contact him at (425) 454-7990 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.