We believe that success in business is determined not by how well owners run a business, but by how well the business runs without them.
Picture two identical companies that:
- Move time-sensitive freight.
- Serve customers across the nation.
- Record $2M in EBITDA (Earnings Before Interest, Tax Depreciation and Amortization).
- Have $25M in annual sales.
It would be logical to assume that the two companies are of similar value. It would also be wrong. In fact, Company A is valued at $6M and Company B is valued at $11M.
Value Drivers Make the Difference.
Neither gross sales nor EBITDA determined the difference in the ultimate sale price and terms of these deals. The difference is directly connected to the presence and effectiveness of value drivers and whether buyers expected those value drivers to continue without the owner active in the business.
Value drivers are internal characteristics of a company that make it valuable to buyers, such as a strong management team, diversity of a customer base, and state-of-the-art operating systems.
Whether you plan to keep your business forever, transition it to family members, sell it to your management team or an outside buyer, strong and durable value drivers give you more options, greater leverage, and a better return on your ownership interest.
As Owner-Based Planning Advisors, we typically measure the effectiveness of value drivers in two ways: 1) their positive contribution to current cash flow and 2) their ability to contribute to future cash flow when you are no longer running the company.
Let’s return to our two freight-moving companies.
Company A
The owner/operator was responsible for management and operations, and his personal and industry contacts were the primary source for new business. All roads ran through this owner so without him, the business had little value and little potential for future growth. A Tale of Two Companies
Company B
Finding the owner of Company B wasn’t easy. She spent weeks on vacation or visiting grandchildren and when at home, was involved in a variety of civic and charitable activities. She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team. Interested buyers were delighted that she had changed her role in the company over the years so that a new owner could step in, almost unnoticed.
Company B’s owner understood that value drivers were necessary to maximize her company’s sale-ability as well as its sale price. For example, she had created a diverse customer base knowing that doing so 1) helped to insulate the company from downturns in any one market sector and 2) would make the business attractive to successors, whether they were members of her management team or her children. She embraced the maxim that “Success in business is determined not by how well you run the business, but by how well the business runs without you.”
The Impact of Value Drivers
Value drivers are critically important. because they impact:
- Whether buyers will consider investing in/ buying a company.
- The amount buyers will pay.
- Whether a company will sell for the amount necessary to achieve its owner’s financial goals.
If you are interested in learning more about value drivers in general or those related specifically to your business, we are happy to sit down and talk.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, you should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Owner-Based Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.