Many business owners fail to plan for how they will exit their business. It’s hard to envision the end of a business while still growing it. However, valuation experts suggest any business development plan should include the inevitable transfer of the business, whether it’s to a family member, an internal successor or an outside buyer.
Most people believe valuation is just what is negotiated between a business buyer and a seller, according to Shina Culberson of Quist Valuation. Value has to be anchored in cash flow and the ability of the firm to be successful in the future, not just the value of its assets today, she said.
“It’s the ability to generate consistent cash flow each and every year,” she noted.
She also warned that what the owner perceives as value might not match a potential buyer’s perception. To get the best price for their company, owners have to think about the transferable value of their businesses.
To build that transferable value, Culberson urged owners to look at six aspects of their businesses.
Financial value. A sound budgeting process is key to building financial value, Culberson said. Business owners need to be able to demonstrate how consistent and predictable their cash flow is. Make sure financial records are in good order.
Customer value. Are customers going to stay with the new owner? Culberson recommended developing a formal process for determining customer satisfaction.
“It will give you insights into what you need to do within your organization to make it a better experience for your customers,” she said.
Being able to share hard numbers that demonstrate customer satisfaction can help show workers the value of what they do every day, as well as potential buyers.
Strategic value. The way customers and competitors think of a business is an important factor in determining its value. “Having a clear idea about what your identity is in the marketplace … is important because those are things that can be transferred,” Culberson said.
Organizational value. Business owners need to have repeatable systems and processes that a buyer can retain to keep the business moving when they take over, according to Culberson.
Employee value. Employee value extends to your relationships with workers, managers and subcontractors. “It’s your expertise, your knowledge,” Culberson said. “How do you work with contractors? How reliable are they? How do you foster those relationships?”
It’s important to make sure that the success of the business isn’t vested in a single person. If success is based on one person, so is failure. “So take a vacation. See what happens,” Culberson said.
Environmental, social and governance. Buyers and other investors are increasingly interested in a company’s ESG; that is, the environmental or social impact a company has, or the diversity of its leadership and how it makes decisions. This is a developing area and can include a wide range of issues like cybersecurity and protecting customer data.