The Roundabout Way to Maximizing Value

You know you’ve got a great business. Year after year for decades you’ve grown your business and seen your bank account rise. Your business hasn’t been without hiccups, but the upward trend is unmistakable. Based upon this consistent growth over time, your business must be worth a lot of money, right?

As it turns out, the answer is not so straightforward.

When it comes to the sale of your business, the most prized assets are the ones that have the highest potential to generate recurring future cash flow for the new owners. So the key to a successful business sale is not historical or present cash flow, but transferable future cash flow.

For clarity, assume you are a magician and you’ve been a magician as long as you can remember. You’ve built a name for yourself and you’ve got a strong customer base. You generate a lot of cash flow every year. Your business offers something other people want (predictable, recurring cash flow), but it cannot be transferred to another intact. Why? Because the entire business is based on your skills alone. You walk away and the business disappears with you.

Now, assume you are a construction contractor. You scale up as the project requires, but your business changes dramatically from year to year. On average, you generate significant cash flow. You’ve done a good job at building your organization (it runs whether you’re there or not), so it could be transferred to a new owner.  But you are in a project-based business. You have many similar competitors and your cash flows are highly volatile from year to year, making new investors leery. It could be a challenge to find someone who sees much transferable value in your business.

These two examples illustrate that the value of a business is not just a matter of arithmetic. By understanding what creates business value both the magician and contractor can come to understand their current situation and what can be done about it.

For most business owners, the biggest potential financial reward is in the successful sale of the business. Sure, the business generates salary and profit distributions, but the potential for profit from a sale can result in many multiples of a single year’s cash flow.

To maximize your chances of a successful sale, you can take tangible steps toward creating transferable value. At Doescher Group we help business owners exit on their terms. If you want to learn more about how to increase the transferable value of your business, reach out to us to learn more.