If you ever want to sell your company or bring in an investor, you’ve got to focus on these two words: Transferable Value.
Transferable Value is what a buyer owns after the transaction closes. From your point of view, the buyer is going to own a wonderful and very profitable business. From their point of view (which is the only one that counts) they are going to own a business that may be losing a critical asset –YOU. Therefore, painful as it may be, you’ve got to FIRE YOURSELF.
In short, smart Buyers don’t buy YOU companies because the key asset is in fact the current owners and they are not transferable. So, if you are critical to your company’s success, your business may lack transferable value because its value is limited to the resale value of the hard assets, which is oftentimes very little.
There are three fixes for this dilemma:
FIRE YOURSELF and hire a replacement professional manager who has no family ties;
Become an IP (intellectual property) based company which is valuable for strong transferable assets in the form of patents, trademarks, copyrights and trade secrets; or
Do both of the above.
In this post, I will focus on Option 1 – FIRE YOURSELF.
As mentioned above, if you are the soul of the company, the repository of its knowledge, or even just a charismatic leader, buyers will fear that as you go, so goes the business. The buyer can prevent you from competing with it by contract, but the buyer needs to know if the business can truly excel in the buyer’s hands. That requires FIRING YOURSELF and having 2-3 years of non-family management to prove that it works.
So, in essence, you are intentionally replacing the best person for the job (YOU) with someone who has much less knowledge of the field, much less experience in running your company, and who does not have his/her heart, soul and life’s commitment in the company as you do. You are proving that your leaving allows the company to stay strong and profitable.
Your first reaction to this might be: “Are you kidding?”
Your second reaction should be: “I get it. The buyer needs to know if it can run the business without me in order for the buyer to be willing to pay top dollar.”
FIRE YOURSELF is tough. You have to think like a buyer and park your ego. Then you have to pay someone to do your job while you sit on the sidelines. Finally, you have to risk the success of the business on someone who isn’t you.
If you are able to FIRE YOURSELF, you have proven that your business has that magic transferable value.
Your reward: you get your life’s investment out of the business. That should make it worth it.
Are you up to the challenge?
Stop back and read my upcoming post on option 2 above: The alternative to FIRING YOURSELF.
If you would like more information on business succession planning or would like to discuss any of these issues with Burr & Forman’s Business Planning and Succession team members, feel free to give us a call.