In my role as a private business strategist, it’s my job to help business owners answer the common question, “What is my business worth?” My usual answer is, “It depends.” A simple phrase that often sparks lengthy conversation about the science and the art of assigning value to a business.
As the adage goes, “Beauty is in the eye of the beholder.” In the case of family-owned business succession, the true value of the business is a compilation of multiple factors, including the perceived value of the business from the perspectives of many, the market and prospective buyers included.
With day-to-day operations at the center of their focus, most small to mid-sized business owners rarely take time to step back and reframe their view of their company through a lens which the market or a prospective buyer may use. Yet this exercise can help identify drivers of enhanced value that exist beyond the usual metrics — profit margins, adjusted EBITDA, revenue diversification, etc. — used to scientifically evaluate worth.
The first and arguably most impactful driver is transferability. Business owners are laser-focused on the creation and maintenance of their business, which, through their efforts, grows steadily over time. If this focus is not balanced with attention to documenting methodology, there could be a potential impact to transferability. Similarly, if the business owner singularly maintains relationships with large clients or primary suppliers, a future buyer then view this as a potential risk.
An easy way for business owners to assess their current transferability is to ask, “Could I take three months off?” If the answer is an easy “yes,” than it’s likely there is a sufficient oversight structure of key personnel in place, who are supported by well-documented systems and processes. If the answer is a clear “no way!” then transferability would be impacted and perception of value can be negatively impacted.
Company culture is a close second to transferability as a driver of value.
More than just a corporate buzz word, culture is tangible. As business leaders work to bring their vision to life through their teams and the work environment, it’s important to remember that this work is setting a precedent that will be taken into consideration when it’s time sell the business. For example, if you have a casual jeans and t-shirt dress code, this could create pause for a more conservative buyer. In the same vein, some companies offer exceptional pay and benefits packages, including perks such as team-building trips to exotic locations. While this may foster loyalty and help with the retention of high-performing employees, a potential buyer may not plan to offer similar perks, resulting in a drop in perceived value as they take into account inevitable turnover and subsequent decline in revenue.
Businesses retain their premium value when they offer something that another entity wants or can buy it at less cost than building it themselves, if replication is not possible. It’s important for business owners to be aware of what differentiates them and take action. If it’s a process, document it.
If it’s talent, identify what makes employees great and work hard to retain them, while replicating the hiring processes that generated high-performing teams. If it’s a product, protect it.
Understanding priorities as an owner will help for better negotiation when the time comes to sell the business. If maintaining company culture is of paramount importance post-sale, it may result in settling for a lower sticker price in order to find a buyer who shares these intentions.
All these activities come with significant impact to the business owner, both professionally and personally. It is imperative that a business owner have a thorough personal financial plan in place to enable the comparison of real figures to how much value has been subjectively assigned to the business. The plan should address questions about the personal impact of selling a business, including:
- How much do you need to sell your company for in order to maintain desired lifestyle and legacy goals?
- If there is a lack of transferability, is there willingness to work with the buyer for several years to ensure a higher sales price, or would you be willing to walk away sooner, for less?
Taking the time to engage with a financial planner specializing in business succession can better equip a business owner to assess their business worth from a subjective and objective standpoint.
Karina Horton is a Private Business Strategist Senior Wealth Planner, VP at PNC Bank. Reach Karina at email@example.com or 513-602-2329.