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FROM: JUL-AUG 2008 ISSUE | BY MARK WARDELL
How can I help my clients understand the factors that truly influence real market value so that they can address these factors effectively as they prepare to sell their businesses?
Most business owners struggle to understand the internal factors that influence market value. That’s because value is a difficult concept to understand and measure. It’s not as simple as the revenues, assets, and profits seen on financial statements.
Now more than ever, business owners are paying attention to this topic. The Canadian Federation of Independent Business estimates that more than two thirds of independent Canadian business owners are planning to exit their businesses in the next 10 years.
So how do you help your clients identify and drive the value of their businesses? First, you need to help them understand that a valuable organization is one that runs independently of its ownership. Therefore, one of the goals of an effective succession plan must be to maximize goodwill, by transforming a business from an “owner-reliant organization” into a “genuine investment.”
Consider the following concept I call the value pyramid. It’s designed to help a business owner consider the goodwill value of his or her business from the perspective of a potential buyer. The value pyramid consists of four levels of business development. As a business moves from one level to the next, risk is reduced, and the business takes a corresponding leap in value.
Level One: Owner driven business. In this type of business, the owner makes it all happen. Because this level of business is highly reliant on the owner, the risk of a business losing its profitability following a succession is at its highest.
Level Two: People driven business. In this scenario, key people in the company, other than the owner, make the business happen. At this level, succession-related failure is reduced, but key people could leave, taking valuable information and even customers, with them.
Level Three: Process driven business. In this type of business systems greatly reduce the risk of failure after a succession. Systems are in place to ensure that operations continue according to plan, with or without the owner or key employees, so the business is set up fairly well to run itself.
Level Four: Culture driven business. In this environment, the culture makes the business happen. Level Four is considered as close to a pure “investment” as a business can come. Its culture indoctrinates new hires into an environment of continuous improvement, based on systems. The result is what I call a “culture of excellence.” This type of business has the least chance of succession-related failure, and is therefore considered the most valuable.
Guide your client to determine which of the four levels they are at. They can systematically grow business value by developing and executing a succession plan that takes them as close to a culture-driven business as possible.
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