Midland Business Evaluation – Where Transferable Value Comes From

One of the most important elements of a successful business transition is transferable value. No matter what an owner sees for the future of the business, the transferable value can be the common denominator that makes all goals more achievable. Transferable value for businesses is captured in an independent Midland business evaluation. 

What is Transferable Value

Transferable value, for a Midland-based closely-held business, is most simply what a business is worth to someone else without its original owner. Transferable value should not be confused with profit. Just because a Midland company brings in millions of dollars of profit each year, does not necessarily mean it has transferable value. True transferable value in a business is determined not by how well you run the business, but by how well the business runs without you. Many business owners are very profitable and believe their company is run efficiently. However, when a Midland business evaluation is performed by a firm like Caprock Business Consulting, the risks associated with the transferable value is exposed, and the consequences may be undesirable. 

Midland business owners aren’t always aware that transferable value is more than a formula involving multiples of earnings or some calculation of discounted future cash flows, which are reflected in a business evaluation. To get a more accurate representation of the current state of your company’s transferable value, you can start by asking yourself a few questions:

• If you permanently leave your business today, would it continue with minimal disruption to its cash flow?
• Who will be responsible for running the business without you—and with minimal disruption to cash flow?

Value Drivers

One way to start to build transferable value is to evaluate your value drivers. Installing and enhancing value drivers can help create a company that can be transferred to someone else (whether that’s the next generation of family members or an outside third-party buyer)—without the owner—with minimal disruption to its cash flow. This is a valuable technique that will have an immediate impact on the business evaluation. Some examples of value drivers that you may need to focus on are:

1. Next-Level Management  
2. Operating Systems Demonstrated to Increase the Sustainability of Cash Flows  
3. Diversified Customer Base 
4. Proven Growth Strategy  
5. Recurring Revenue That Is Sustainable and Resistant to Commoditization
6. Good and Improving Cash Flow 
7. Demonstrated Scalability 
8. Competitive Advantage 
9. Financial Foresight and Controls 

One might measure the effectiveness of value drivers in two ways:

1. Their positive contribution to cash flow.
2. Their ability to continue to contribute to cash flow under new ownership.

A company with strong value drivers might demand (and receive) a higher pricing multiple on the same amount of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) than a company with weak or non-existent value drivers. However, business owners should note that not every industry is treated equally. A Midland business evaluation firm like Caprock Business Consulting is the best source to understand the local and company-specific value drivers that affect the value of your company.

Build Transferable Value with Your Management Team

Building a management team that you can confidently leave your company with can be challenging. You may want to create a loyal “next-level” management team that will not only maintain the value of your business but is just as motivated as you are to grow the business to new heights. Understanding where your company may have weaknesses is an important step in knowing the type of person you will need to attract to help fill the gaps. It’s worth it to ask yourself whether you are focusing on attracting people with the skill sets the company needs to accomplish growth independently from the efforts and resources of the current owners. Establishing this highly qualified team long before you think you’ll transfer the can give them the time and space to prove their ability to perform.  

Attracting the right team is the first step, retaining the team long after your departure is the real task. To hold onto these vital team members, they may require more money or some percent of ownership as a condition of employment. Creating an effective incentive plan that fits the needs of your team is the best way to ensure your management team stays in place and continues to increase business value after your departure.

Historical Pricing Multiples Are A Thing of The Past

Midland companies seeking an evaluation after February 2020 will also have to look at things completely differently. Generally, historical pricing multiples were applied to historical earnings metrics (like EBITDA mentioned earlier). The Covid-19 pandemic has changed the earnings for most companies starting in February 2020 and later. Appling historical pricing multiples to historical earnings distorts the Midland evaluation and the common methods used in the Market Approach to value. If your company has not been affected, historical pricing multiples can be used like they always have been. However, if your Midland company has been affected then you need to either:

1. Apply forward-looking multiples to forward-looking earnings. This is possible using public company information but it is almost impossible for private transactions.
2. Apply historical multiples to historical earnings, then subtract the present value of the lost earnings due to Covid-19. This method will require a professional Midland business evaluation firm to calculate the lost profits.

For more information or to discuss business evaluation issues in confidence, please do not hesitate to contact us. Caprock Business Consulting is happy to help.