Jim Grebey knows a lot about selling a business, but that doesn’t mean he can sell his own. In fact, Jim’s understanding of what makes a business attractive to a buyer helped him realize his own business is unsellable, and he’s OK with that.
Jim made choices about how he’s run his business. Those choices have a positive impact on his professional life, but a negative impact on his ability to sell. The concept of “transferable value” is a critical one to understand if you intend to sell your business someday. Jim explains the concept by looking at his own business in this excerpt from his book Moving On — Getting the Most from the Sale of your Small Business.
Are you as aware of the choices you’re making in your business, and the impact they have, as Jim is?
Moving On Excerpt
My own business Diligent, Inc. (Diligent) is an example of a business with nontransferable value. Diligent is a small consulting business that my wife and I operate. My wife says I should call it a boutique consulting business! By design, Diligent has never had more than two or three full-time employees; we only take on one or two clients at a time. This is the business model under which I have chosen to work and that has supported me for years. We offer operations management services, positioning services, and due diligence services to our clients, who mostly come to us through referrals. We’re not interested in growing Diligent into a twenty-employee consultancy.
Diligent was built on our personal experience, skills, and reputation for improving client operations while helping them grow their business. If we were to try to sell our business, we would have to remove ourselves, and there would be no transferrable value remaining in the business.
Without us, Diligent does not have transferrable value that would interest a buyer. For some owners that’s a tough admission.
In our case it reflects the limits we established for our business. This allows us to do what we enjoy doing. Under a different model, if we choose to grow the transferrable value of our business, we would have to bring on staff and other consultants and focus on growing our own business instead of focusing on growing our clients’ businesses. Personally, I don’t need a gaggle of employees to feel successful. I have had the opportunity to manage a large staff several times in my career and choose not to do it any longer (managing employees takes a lot of time). When I have employees, my job becomes managing them, which doesn’t allow me the time to be an advisor to my clients—the job I prefer to do.
Similar cases also exist where the transferability of value is constrained because the business requires professional licenses that are tied to individuals—for example, financial or real estate certifications; alcohol or other products needing extensive background checks, or agricultural licenses needing specialized training, for example. If the license is not transferable, then it doesn’t add to the value of the business. It’s important to know the local regulations for professional licenses because they change state by state or province by province (be sure to include the transferability of professional licenses in your discussions when you meet with your attorney).
These businesses can be sold, but the new buyers must be licensed—meaning the transferrable value of the business comes from its assets. Because the rules for professional licenses are subject to frequent change, you should be wary of making assumptions about them. Also, be aware that there are regulations limiting the ownership of certain businesses only to licensed individuals. This could restrict the pool of buyers; you must see the potential buyer’s license to qualify them as a buyer.
Look honestly at your business to determine whether there is value that can be transferred to a new owner. A business that is tied to a unique location, for instance, may lose a great deal of value or may not be salable if that location were no longer available. What gives your business its transferrable value?
Look for any situations that limit the transferrable value in a sale. Many times, there is something you can do to improve the transferrable value of your business.
However, not all businesses have transferrable value that can be sold.
It’s critical that you take the time to identify the true transferrable value of your business and be ready to take the steps needed to improve and spotlight that value as much as possible.
Jim Grebey is president of Diligent Inc., which provides positioning services for small businesses preparing for a sale and operations due diligence services for investors. He is the author of Moving On — Getting the Most from the Sale of your Small Business, published by DeGruyter, and Operations Due Diligence — An M&A Guide for Investors and Businesses, published by McGraw Hill