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Lack of Transferable Value Can Put a Deal in Jeopardy

Submitted by John Brown on Fri, 05/07/2021 - 8:00am

In one of our previous posts, we described how an owner’s exclusive focus on top-line sale price rather than the net proceeds from the sale of a business can cause an owner to kill the deal when they discover the shortfall. This blog discusses another lurking Deal Killer: the failure to create a business that can thrive without its owner’s continued involvement. 

It is up to an owner’s advisors to explain the consequences of a failure to create a saleable business—especially how that failure jeopardizes the owner’s ability to achieve their goals—long before the sale process begins.  

Emile and Susan Hartwig owned a large new and used utility trailer business. Their advisor, David Reiser, relates to their tale of woe. 

“Susan called me after a business broker told her that he represented a buyer interested in  the company. While Susan realized that the deal was not great—most of the purchase price was tied up in various earnouts—she also knew that Emile was exhausted from working 60+ hour weeks for the past 26 years. 

“I remember that during a meeting two years before her call, Susan mentioned they were looking for a sales manager. When I asked how that search was progressing, Susan told me that the guy they’d found didn't work out. I knew that the most time-intensive part of the business for Emile was sales, so I asked whether they’d replaced him. She told me that they had not and didn’t have the energy to try to find another sales manager. Susan went on to describe how Emile spent his days dealing with customers and coordinating the sales team. He was naturally beat when he got home, but still had to manage the books before going to bed. It was no surprise that Emile was exhausted. 

“Given the purchase price and earnout, the Hartwigs' options were pretty bleak. They could either sell the business for much less than they required, or stay on for nearly three additional years to make sure they hit the earnout numbers and maximized their payday. 

“I think we all realized that it was too late in the game to increase the Hartwigs’ options. Emile was running on empty.”  

Many advisors might wash their hands at an owner’s refusal to take action to solve their business problem. But David was inclined to help. 

“But then I realized that they didn’t know what to do to grow their business, to create transferable value, so they just kept doing the same thing. Inevitably their burnout steadily increased. They didn’t know who to turn to for help. That person who could help could have been…should have been….me.” 

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David was spot on. Many owners, especially those who start their businesses from scratch, have neither the knowledge nor the experience to grow their businesses beyond their capacity and their skill set. If they leave, their businesses will wither away because they have failed to create “transferable value.” When they don’t know what to do or who to ask for help, like the Hartwigs, they do nothing. 

Your Opportunity

In failing to create transferable value, owners give us an enormous opportunity to play a key role in helping them develop and implement plans to develop sufficient business value to achieve their goals.  

We ask our BEI Exit Planning Boot Camp participants why they’ve chosen to invest their time and money in the BEI resources and training. The majority of the attendees responded that the reason they are investing time in their Exit Planning education was to either improve or adopt a consistent planning process, expand services to existing business clients, or make a difference in the lives of their clients.

The Solution 

If you are interested in these same goals, we suggest that you acquire the necessary knowledge and tools to better advise your owner clients. 

Unless we help owners build significant value in their companies long before they intend to exit, we fail to help them develop and enhance transferable value and make them easy prey for this Deal Killer.  

Takeaways 

  • Most advisors do what they do to make a difference in the lives of their clients. 
  • Many of these same advisors don’t know how to make a meaningful difference in their business owner clients' lives. 
  • Implementing a strategy to build transferable business value makes that measurable difference in the lives of your business-owning clients. 
  • If you can’t help your clients maximize the value of their businesses, who will? 
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