Would Your Business Be Worth as Much the Day After You Leave?

Most exit plans I’ve reviewed over the years start with the same question: what is my business worth? It is a fair question. It is just not the one a buyer is asking. A buyer wants to know whether your company will be as good the day after closing as it was the day before, and most owners have never tested their business against that.

Is Your Cash Flow a Pattern or a Story?

One great year makes a nice story. Five years of steady or growing cash flow makes a case. Buyers pay for what they believe will repeat, and a single strong year invites the question of whether it was luck.

This is also where a quality of earnings report comes in. That is an independent review of your financials that tests whether your reported earnings hold up under scrutiny and a variety of possibilities. Buyers rely on it, and you would rather know what it says before they do.

Who Walks Out the Door With You?

If 30% or 40% of your revenue comes from one customer, a buyer will notice, and they will discount your value. The same goes for people. Key employees with fair employment agreements give a buyer confidence that relationships will not leave when you do.

Some owners go a step further and give those people a stake in the outcome. A stay-on bonus is a payment for staying through the transition. Phantom stock is another way to accomplish this where the value of the award tied to the company’s value, without handing out actual shares. Neither is right for every company, but both are worth a conversation.

When the Red Sox lose a home run hitter, nobody expects one signing to replace him. The production gets spread across the lineup. A buyer wants to see the same thing in your company: no single customer and no single employee carrying the whole team.

Is Your Own Job Written Down?

Here is one part owners tend to skip. If you are the one who quotes the work or makes the bank deposits, write it down. A buyer may need to step into your shoes, and they cannot step into a job that only exists in your head.

Try this test. If you did not show up for the next 90 days, who would quote the work, make the deposits, and keep your top three customers happy? If the answer is you, you, and you, a buyer will see that too.

If you have never had a formal valuation, start there, well before considering a potential sale. A good valuation shows you where the business is strong and where improvements can be made so a buyer will find fewer gaps. It also belongs in your personal plan. It is hard to build an estate plan, or decide when you can afford to step away, without a credible value for your largest asset. That is where your attorney, your CPA, and your advisor need to be working from the same page.

None of this happens in a quarter. I walk through it in more detail in “Maximizing Business Value Leading Up to an Exit” (watch the episode). If a sale is somewhere in your future, it is worth a conversation now rather than later.

Buyers pay for what will still be there after you leave. Build that first.