Volume 7 • Issue 4 • April 2017
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month’s issue will be a discussion of step three of the exit planning process – Building and Preserving Business Value. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
Over the last several months, we have discussed the seven step exit and succession planning process. In this month’s issue, we will take a closer look at step three – building and preserving business value. In step two we addressed valuing the business. Obtaining a business valuation from a qualified professional will not only tell you how much the business is worth, it will also tell you what you need to work on to increase the value.
In preserving value, you must look at both the internal and external threats to your business. By engaging in planning, you don’t wait for the problems to occur, you identify potential threats and plan for how to avoid them. The following are examples:
- Taking steps to protect proprietary information and trade secrets;
- Putting non-competition and non-solicitation agreements in place to prevent employees from stealing customers, employees, and business relationships.
Taking necessary steps to protect what you have already built is an essential component of the business succession process.
Building value involves looking at the current value and determining what can be done to improve. Your business valuation will uncover areas where the business is deficient. However, not all deficiencies in your business are created equal. You need to focus on those areas that will truly improve the value of your business. We call these “value drivers.” John Brown, in his book Exit Planning: The Definitive Guide, sets forth nine value drivers that if addressed can build or preserve the value of your business. Those value drivers are:
- Next Level Management
- Operating Systems that Improve Sustainability of Cash Flows
- Diversified Customer Base
- Proven Growth Strategy
- Recurring Revenue that is Sustainable and Resistant to Commoditization
- Good and Improving Cash Flow
- Demonstrated Scalability
- Competitive Advantage
- Financial Foresight and Controls
Following the business valuation, you and your team should assess and address these value drivers. By doing so, you will be able to increase the transferable value of your business.
There are three basic approaches to valuing a business: (1) the income approach; (2) the market approach; and (3) the asset based approach. But, what will really determine what you are able to receive for your business is the transferable value. The “transferable value” of your business is what it is worth to someone else without you involved. This will require you to make yourself personally irrelevant to the business. It is not that you do not perform essential functions, it is that those functions can readily be performed by someone other than you without an adverse effect on the profitability of the business.
By preserving the current value of your business, working on those areas that can increase the value, and making yourself irrelevant along the way, you will be able to maximize your return. With step three in process, you will be ready to move on to identifying your potential successors/buyers.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.