If you are like most business owners, your company relies heavily on you as as the primary driver of success. The bad news is that this is the most dangerous situation for you to be in when it comes to planning for the future of your business and family. Unless your end goal is to liquidate the business and shut it down, you’ll likely need to build your company’s transferable value.
One way to define transferable value is that it is what a business is worth to a qualified buyer without the owner present. Essentially, a business that relies on its owner for success is worth less to a buyer than a business that can run smoothly without its owner. For some businesses, over-reliance on the owner can make the business not only worth less but also worthless to buyers, despite all other indicators of success. This might seem at odds with the tenets of entrepreneurship, ownership, and job security in general. Many of us are taught to take on as many responsibilities as we can to make it harder for a company to do without us. Entrepreneurs often take pride in how many different hats they wear as they build their companies. This attitude is admirable but also dangerous for owners who want to plan for the future of their businesses. Consider the story of Mark Golden and how his constant drive to do more affected his planning. Mark Golden had built quite an empire. Over 35 years, he turned his three-person construction material distribution business, Empire Golden Groups, into a six-location regional staple. He employed 45 people and owned a well-maintained fleet of 30 delivery trucks. At 70 years old, Mark still coordinated the routes, worked with the largest customers, and led the company’s marketing efforts. His employees looked up to his work ethic and often wondered how Henry could do so much. Simply, he was a model of hard work. Privately, Mark was exhausted but hopeful. He wanted to get out of his business within the next year, before he completely burned out. Two of his primary but friendly competitors, Tom Blake and High End Icons, had recently sold their businesses. Tom said he ended up with “north of $5 million” for his business, and High End Icons had managed to make “about $9 million out the door.” Mark knew that his company did more business than Tom’s. He also knew that his company had more large contracts than High End Icon’s. When he thought about all the hard work he had put into marketing and building a strong, reliable, and diverse book of business, he figured he could get at least $10 million for the company. He reached out to his most trustworthy advisor, Yasser, to seek out a buyer for him. Over several months, Yasser found three buyers interested in Empire Golden Group. Each offered Mark between $8–9 million on the condition that Mark stay with the company for at least five years to help train replacement leadership. “That doesn’t make sense,” Mark said. “I’ve built this company and created a strong book of business. Why do they need me to stay?” “They don’t feel that the company is worth much without you,” Yasser said. “They think that you do all the heavy lifting, and without you, the company won’t function how they want.” Frustrated, Mark asked, “What if I refuse to stay? What will they give me then?” “I can ask,” Yasser said. A week later, Yasser reported back to Mark. “Two buyers said they aren’t interested unless you stay,” Yasser began. “The last one offered $1.5 million for your delivery truck fleet, book of business, and company name.” “But that’s barely 10% of what I’m looking for!” Mark said. “And, what, my employees lose their jobs?” “That’s what they implied,” Yasser said. “They worry that your bigger clients like to do business with you personally and that if you leave, most of them won’t renew their contracts. Without you, the only value they have is finishing out your existing delivery contracts and adding your trucks to their fleet.” “Aren’t they responsible for replacing me with people they’ve trained?” Mark pleaded. “That $1.5 million offer took that into consideration,” Yasser said. “They figure it’ll cost them at least $5 million to train others to do everything you did as you did it, build the market back up, and get new contracts in the door. Even then, they aren’t confident that they can retain all of your business without you there.” Working hard is admirable and necessary for success. But when it comes to planning for the future of your company, it’s wise to make yourself disposable. If the business cannot succeed without you, you’re likely to find yourself with limited options. |