What are Non-Financial Components of Transferable Value?
When a business value is calculated, the starting point is always the financials. Analyzing the numbers is foundational to understanding the value that can be transferred to the buyer.
However, it’s equally important when valuing a business to consider the non-financial aspects of the organization. These are called the “non-financial components of transferable value”.
What exactly is meant by this mouthful of a phrase?
These are the elements of a business that are not tracked in your accounting books but still add value to your business. They also need to be able to transfer value to a buyer of your company.
In the event of a sale, having strong non-financial transferable values in your business is incredibly valuable. In this blog, we’ll discuss some of the non-financial components of transferable value. If you are looking to boost the value of your company and make it more attractive to potential buyers, focusing on these non-financial components can have a dramatic effect.
1. Effective Management and Supervisor levels – The management layer of the organization is so important because it manages 75% of the human resources in the company. They are the ones who supervise and manage the productivity of your business. Most often, the managers are the ones that are running the business. When a buyer finds a strong management team, they know that the work will continue to get done even if the owner leaves. The business will remain a viable ongoing enterprise.
2. Systematic revenue generation not dependent on owner – For many small businesses, the owner is the “rain maker” - the person generating all the revenue. Take away the owner, and the sales pipeline dries up. Make sure your sales process involves more individuals than the owner, and you can show a systematic method for generating leads that turn into revenue.
Take for example a prior business we’ve worked with. This business struggled with inconsistent revenue for many years. The CEO was responsible for revenue generation, but had trouble focusing on both bringing in new clients and delivering services to existing clients. The lack of consistent focus on business development was hindering the company’s growth. After much trial and error, we helped them create a systematic marketing approach that was not dependent on the CEO to be effective. In the last year of business, they were receiving a request for a proposal every day of the year. The company was no longer tethered to the CEO for revenue generation.
3. Efficient, documented processes – A key to having transferable value in a business is to make it so that the company is not heavily dependent on the owner. Standard processes are a key way to achieve this. Processes capture the organizational knowledge on how to best perform a task. Once the process has been created, you can eliminate dependency on any specific individual. If you can’t train another person how to do a task, you can’t delegate it. If you can’t delegate it, you can’t transfer the value of that task to the next owner. Processes that are trainable, retainable, and scalable will show the buyer that the knowledge in your organization is not limited to the owner, but that it is ready for growth.
4. Clear roles and responsibilities – Having clear roles and responsibilities not only helps your staff to be more effective and engaged, it also shows the buyer that the organization’s work is well defined and allows for decision making responsibility to be shared throughout the organization.
Think about a potential buyer visiting your company. Does he find an organization with well-defined structure? Are position titles meaningful and consistent? Does each person have clear roles and responsibilities? Do you think the value of a business that has all of these things worked out looks more attractive to a buyer? If there is chaos in the organization, uncertainty, and lack of clarity – that company will be valued for a lot less.
5. Healthy Workplace Community – An energetic, engaged workforce can have a tremendous improvement on the value of a company; the corollary is also true that a low-energy, non-engaged work environment can not only lower the value, but drive away many buyers. Read our blog for more tips on creating healthy workplace community.
6. Strong brand – A clear brand that has a good reputation in the marketplace can provide additional value to the company since it easily transfers to the new owner. If your branding includes clear offers that are differentiated in the marketplace, this provides an additional boost to the transferable value. Additionally, if the brand name is too tied to the owner – for example James & Sons – it may not have as much value to the next owner.
7. Intellectual property – Having specific methods of doing things that can be protected or, having industry-unique names to your products/services is intellectual property that makes your business more valuable to the buyer.
8. Knowledge of how company makes and keeps money – When the entire organization knows how the company makes and keeps money, everyone is thinking of ways to make incremental improvements. How would a potential buyer react to sitting down with an entry level employee who can explain how the company makes money?
9. Proper contracts with customers and vendors – Having your agreements with customers and vendors in place and reviewed by an attorney can ensure small details don’t hurt your valuation. Be sure your agreements have had proper legal review and are consistent.
10. Clean Financials – If your books are clean and easy to understand, it goes a long way to assure the buyer that there is no “funny business” going on in the financials. On the other hand, if your bookkeeping is inconsistent or you act like your business checking account is also your personal account, you not only will have a company valued for less, you simply won’t get anyone who will be interested in buying your company.
Understanding these non-financial components is the first step. Improving and implementing them is something entirely different. It will take energy to enhance these non-financial components, but the reality is that addressing these areas will not only increase the value of your business, it will also make it easier on you to manage the organization.
You’re already working hard in your business, why not spend your energy on areas that help you be more successful now and pay a dividend when you sell your business later?
[This is an expansion of the original blog – What If My Business Isn’t Worth What I Want?]