EXIT PLANNING
PROVIDED BY KEVEN PRATHER, CFBS
Where Transferable Value Comes From
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ne 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, transferable value can be the common denominator that makes all goals more achievable.
WHAT IS TRANSFERABLE VALUE? Transferable value for a 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 your company brings in millions of dollars of profit each year does not necessarily mean it has transferable value. Actual transferable value in a business is determined not by how well you run the business but by how well the business runs without you. 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. 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. Some examples of value drivers that you may need to focus on are:
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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. 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 multiple on the same amount of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) than a company with weak or non-existent value drivers.
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
HVACR BUSINESS OCTOBER 2021
have weaknesses is essential 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 about initiating a transfer 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 percentage 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. u Keven P. Prather is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to kprather@financialguide.com or visit transitionextadvisors.com for additional information.
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Publication Title: HVACR Business Publication Number: 25431 Filing Date: 10/1/2021 Issue Frequency: Monthly Number of Issues Published Annually: 12 Annual Subscription Price: Free to Qualified Complete Mailing Address of Known Office of Publication (Not Printer): JFT Properties LLC, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039; Contact Person: Barbara Kerr Telephone: 440-731-8600 Complete Mailing Address of Headquarters or General Business Office of Publisher (Not Printer) JFT Properties LLC, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039 Full Names and Complete Mailing Addresses of Publisher, Editor, and Managing Editor Publisher: Terry Tanker, JFT Properties LLC, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039; Editor: N/A, JFT Properties LLC, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039; Owner – Full name and complete mailing address: JFT Properties LLC, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039 Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount of bonds, Mortgages, or Other Securities: None Tax Status (For completion by nonprofit organizations authorized to mail at nonprofit rates) (Check one) The purpose, function, and nonprofit status of this organization and the exempt status for federal income tax purposes: N/A Average No. Copies No. Copies of Single Publication Title: HVACR Business Each Issue During Issue Published Nearest to Issue Date for Circulation Data Below: September 2021 Proceeding 12 months Filing Date Extent and Nature of Circulation a. Total Number of Copies (Net Press Run) 17719 27313 b. Legitimate Paid and/or Requested Distributor (By Mail and Outside the Mail) (1) Outside County Paid/Requested Mail Subscriptions stated on PS Form 3541 (Include direct 11166 11698 written request from recipients, telemarketing and Internet requests from recipient, paid subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies.) (2) In-County Paid/Requested Mail Subscriptions stated on PS From 3541 (Include direct written 0 0 request from recipient, telemarketing and Internet requests from recipient, paid subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies) (3) Sales Through Dealers and Carriers, Street Vendors, Counter Sales, and Other paid or 0 0 Requested Distribution Outside USPS 0 0 (4) Requested Copies Distributed by Other Mail Classes Through the USPS (e.g. First-Class Mail) 11166 11698 c. Total Paid and/or Requested Circulation (Sum of 15b (1), (2), (3), and (4) d. Nonrequested Distribution (by Mail and Outside the Mail) (1) Outside County Nonrequested Copies Stated on PS Form 3541 (include Sample copies, 6461 15510 Requests Over 3 years old, Requests induced by a Premium, Bulk Sales and Requests including Association Requests, Names obtained from Business Directories, Lists, and other sources). 0 0 (2) In-County Nonrequested Copies Stated on PS Form 3541 (include Sample copies, Requests Over 3 years old, Requests induced by a Premium, Bulk Sales and Requests including Association Requests, Names obtained from Business Directories, Lists, and other sources). 0 0 (3) Nonrequested Copies Distributed Through the USPS by Other Classes of Mail (e.g. First-Class mail, Nonrequestor Copies mailed in excess of 10% Limit mailed at Standard Mail or Package Services Rates) 0 0 (4) Nonrequested Copies Distributed Outside the Mail (Include Pickup Stands, Trade Shows, Showrooms and Other Sources) e. Total Nonrequested Distribution (Sum of 15d (1), (2), and (3) 6461 15510 f. Total Distribution (Sum of 15c and e) 17627 27208 g. Copies not Distributed 92 105 h. Total (Sum of 15f and g) 17719 27313 i. Percent Paid and/or Requested Circulation 63% 43%
16. Publication of Statement of Ownership for a Requester Publication is required and will be printed in the October 2021 issue of this publication. 17. Signature and Title of Editor, Publisher, Business Manager or Owner Terrence Tanker, Publisher 10/1/2021 I certify that all information furnished on this form is true and complete. I understand that anyone who furnishes false or misleading information on this form or who omits material or information requested on the form may be subject to criminal sanctions (including fines and imprisonment) and/or civil sanctions (including civil penalties).
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