I oftentimes see business appraisals based purely on financials and no other factor is considered in the appraisal. Yes, a company’s financials is usually the biggest determining factor on its market value, but there are other items to consider. One of these factors is the existing staff and management in place.
The attractiveness of the business to a buyer is what is transferable to the buyer not the ongoing management prowess of the seller. If the owner/seller has a management team that can not sustain the growth of the business without his personal involvement, the business has significant future risk and as a consequence, represents little value to a buyer. To some owners, this may seem counter intuitive and an assault on their ego, but it’s a fact. If the business can not survive and grow without the owner’s daily interaction, its value will be diminished drastically no matter how much it has grown or generated profits in the past.
Many savvy buyers recognize the value of great management teams especially when they do not have all of the necessary experience to effectively run the company they acquire. In fact, many prefer to acquire a company with strong management in place. Creating, motivating and retaining great managers is key to capturing future business value. Without a strongly motivated and secure management team, the risk to a projected earnings stream is just too high.
Having a seasoned staff and someone that could effectively manage the company is indispensable to any company’s long-term future. The reason is simple: management is responsible for the creation, direction and rate of growth of all other value drivers. Things like customer diversification, a proven growth strategy, sustainable revenue, improving cash flow, competitive advantage and financial controls all depend on good management. More effectively than any other value driver, top-notch staff and management creates transferable value.
A business owner cannot be the only person responsible for driving growth if a company is to evolve beyond its current abilities. To realize the potential a buyer will pay for, sellers must create transferable value with existing staff and seasoned management that plan to stay on board with a new owner. When it comes to selling and appraising a business, transferable value plays a key role in adjusting the competitive multiple that is applied to earnings.