Many business owners believe their business will sell overnight. When they finally go to market to find a buyer, those same owners are often surprised to hear that they have not done enough to make the business sellable. They have built a nice career for themselves that provides steady income (or a lifestyle business), but have not created a company with transferrable value. Business owners who have created a company with transferrable value usually have focused on systems, processes, and recurring revenue, which generally leads to a more attractive business to sell. Oftentimes, the transferable value comes in the form of intellectual capital and goodwill due to the enterprise value created by the owner(s).
In previous centuries, the majority of the wealth was created through physical assets such as land, natural resources, and machine labor. As innovation has disrupted our economy, today wealth is often created not only by physical assets, but in one’s ability to create, assemble, integrate, or take advantage of intangible intellectual assets. Managing these intellectual assets may be the most important aspect of creating a company with transferable value. The value of the knowledge assets can be bought and shared, which may lead to higher multiples at sale.
Your intellectual assets can be divided into the following four categories:
- Human Capital—Simply put, this measures the talent of your management and employees. Buyers will value a competent, well-trained team that is able to operate a business without heavy involvement from an owner. When evaluating your human capital, a buyer will be scoring you in various areas, including talent/competency, experience/tenure, management skills, professional and technical training, and customer/market knowledge. If you are a business owner who is struggling in this area, look to recruit, motivate, train, retain, and continue to evolve the skill sets in your business to make sure you have attractive human capital prior to your exit.
- Customer Capital—This capital refers to how “sticky” your customers are and any other risks related to your customers or clients. Part of evaluating your customer capital is determining the strength, depth, length, and contractual nature of your customer relationships. Stronger companies are able to deliver consistent, reliable, and recurring transactions to the same customers year over year. Careful consideration will also be given to customer concentration, as that is a huge risk if most of the revenue comes from one customer. However, the most important piece may be that these customer relationships need to also be transferable, otherwise few buyers would be willing to pay a premium for your business.
- Structural Capital—This capital is the “lubricant” that makes everything work in your business. Structural capital refers to the technology you own, the repeatable systems and processes you implement, and tools that help the human and customer capital be even more effective. This takes the best practices inside many business owners’ minds and turns it into a transferable asset that can be purchased, learned from, and applied. Developing structural capital means that knowledge doesn’t walk out the door when there is turnover within the company.
- Social Capital—This capital represents your values, culture, brand, how the team works, internal and external communications, and how you treat your employees. These are the areas that set business apart, although it is difficult to measure. You know it when you have it, and you know it when you see it at a company.
Whether you are looking to sell soon or haven’t thought about it yet (eventually everyone will exit whether they want to or not), focusing on the intellectual capital areas outlined above will help you make the business more transferable. This is key, as you won’t be able to sell your business at a premium if your intellectual capital is not transferable. Taking action now can help set your business up to benefit you now and in the future.
At CCMI, we focus on helping business owners evaluate how their business fits into their overall financial lives—and exiting a business can be a big part. Give one of our advisors a call if we can assist you in determining how your business fits into your financial future.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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