Follow Dallas Linkedin
Email Dallas Email
Financial
Jun 30, 2020

Where Transferable Value Comes From

Sponsored Content provided by Dallas Romanowski - Managing Partner, Cornerstone Business Advisors

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?
Value Drivers

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:
 
  1. Next-Level Management  
  2. Operating Systems Demonstrated to Increase the Sustainability of Cash Flows  
  3. Diversified Customer Base 
  4. Proven Growth Strategy  
  5. Recurring Revenue That Is Sustainable and Resistant to Commoditization
  6. Good and Improving Cash Flow 
  7. Demonstrated Scalability 
  8. Competitive Advantage 
  9. Financial Foresight and Controls 

One might measure the effectiveness of value drivers in two ways:
 
  1. Their positive contribution to cash flow.
  2. 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 skills 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.
 
Welcome to Cornerstone's Exit Planning newsletter. We'll provide you with practical tips on planning your business exit twice a month. Click here for a complimentary planning assessment. Contact us with any questions or to help get you started with the planning process. Enjoy!

Dallas RomanowskiChip Mayo, and Mike Leannah

© Copyright 2020 Business Enterprise Institute, Inc. All Rights Reserved

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email [email protected]

Other Posts from Dallas Romanowski

Bizjournalblockad
Ico insights

INSIGHTS

SPONSORS' CONTENT
Untitleddesign7

Understanding the Key Roles of Officers in a Community Association Board of Directors

Dave Orr - Community Association Management Services
Untitleddesign2

The Importance of Real Estate Appraisals

Steve Mitchell - Cape Fear REALTORS®
Headshotrosaliecalarco 1182131047

Medicare and Tech Support Scams Are On the Rise

Trending News

For 348-townhome Project, Carroll Companies Reschedules Community Meeting

Staff Reports - Sep 25, 2023

Crossing That Bridge (and Road, Track, Sky And Water)

Cece Nunn - Sep 25, 2023

Culinary Blends At New Olivero Restaurant

Katie Schmidt - Sep 25, 2023

SeaTox, Partners Awarded $1.5M Grant For Contamination Testing In Alaska

Audrey Elsberry - Sep 26, 2023

Bowling, Murphy Join EmergeOrtho Coastal Region

Staff Reports - Sep 26, 2023

In The Current Issue

Study: Tourists Spend Billions In Area

In New Hanover County alone, domestic and international visitors to and within the county spent nearly $1.06 billion last year....


Spotlighting This Year’s MADE Awards

The purpose of the awards is to draw attention to manufacturers and makers in the Cape Fear region....


INFO JUNKIE: Holden Bierman

The founder and CEO of Coastal Cool shares his top info and tech picks....

Book On Business

The 2023 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2023 Power Breakfast: Major Developments