What Does Transferable Value Really Mean?
For a closely held business, transferable value is simply what a business is worth to someone else without its original owner. It is important to not confuse it with profit — your company may bring in millions of dollars of profit each year, but this does not necessarily mean it has transferable value.
True transferable value for a business is determined not by how well you run the business, but by how well the business runs without you. Business owners are not 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 clear picture of your company’s transferable value, you can start by asking yourself these questions:
- If you permanently leave your business today, would it continue without disruption to cash flow or daily operations?
- Who will be responsible for running the business without you, and how will they enhance the company’s transferable value?
With these questions in the back of your mind, let’s take a deeper dive in how to generate transferable value.
How Do You Create or Increase Your Transferable Value?
You create and increase transferable value by strengthening your value drivers. Installing and enhancing value drivers can help create a company that can be transferred to someone else (whether that is the next generation of family members or an outside third-party buyer)—without the owner — with minimal disruption to its cash flow.
To ensure the long-term success of your business long after your exit, it is crucial to examine its value drivers. Here are some of the top value drivers to focus on:
- Strong Management and Leadership: Cultivate a leadership team capable of driving the business forward independently of family members. Invest in professional development and succession planning to ensure continuity.
- Strategy, Branding and Reputation: Invest in building a strong brand identity and reputation in the market. Consistently deliver high-quality products or services and prioritize customer satisfaction to enhance brand value.
- Financial Management and Diversification of Revenue Streams: We would not be a CPA and consulting firm if we didn’t mention the importance of maintaining strong financial management practices, including accurate and timely financial reporting, budgeting, and cash flow management. This instills confidence in potential investors or buyers and enhances the business’s value. As your business grows or the competitive landscape begins to shift, it is important to explore opportunities to diversify revenue streams and expand into new markets or product lines. This reduces dependence on a single source of income and enhances the business’s resilience.
- Organizational Governance Structure: Implement clear governance structures and policies to ensure transparency, accountability and effective decision-making within the family business.
- Succession Planning: Develop a comprehensive succession plan that outlines how ownership and management will transition to the next generation or external parties. This involves identifying and grooming successors, addressing potential conflicts, and ensuring continuity of operations.
A company with strong transferable 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 nonexistent value drivers.
Build Transferable Value With Your Management and Leadership Team
Building an executive and management team that you can confidently leave your company with can feel overwhelming. To be successful, you will want a loyal team that shares your passion and motivation for growing the business. Understanding where your company may have weaknesses, or opportunities to expand, is an important step in seeking out individuals that can bring the necessary skills to fill in the gaps.
When Should You Start Building Value?
The sooner, the better! Establishing your exit plan and assembling a highly qualified team should ideally happen long before the transfer. This will ensure you have the necessary time to create an effective exit plan and find, train, and retain a strong team to take your place.
Let Cherry Bekaert Guide You Forward
By focusing your energy on a few key areas, family businesses can create transferable value that positions them for long-term success and facilitates smooth transitions across generations or ownership changes.
Cherry Bekaert’s Family Business Advisory practice can help you get there. We have experience in everything from governance to next generation coaching to put your family business in a position to succeed and grow for years to come. Whether you need guidance on creating or implementing these transferable value drivers or need help with succession or transition planning, contact your Cherry Bekaert Advisors today, or our Family Business Advisory practice.
