Building a Salable Business

Businesses are typically valued as a multiple of sustainable cash flow.

Businesses are typically valued as a multiple of sustainable cash flow. Sustainable cash flow refers to cash flow that is not dependent or reliant on the business owner’s involvement. The value paid for a business above the realizable tangible asset value is called business goodwill. If the continuity of the cash flow is reliant mainly on the business owner, then, the argument is that goodwill is personal, not salable, rather than business goodwill, that is salable.

Some ways to build up business goodwill are:

• to document and implement processes and procedures that make the business less reliant on the business owner and other key employees 
• to bring trusted employees into key customer and supplier relationships
• to build a management team that can operate the business with minimal involvement from the business owner
• to have a clear vision for the business that employees can buy into
• to increase and understand your competitive advantage in your industry.

In smaller businesses, the most attractive option can be to sell to a key employee or a group of key employees that may or may not include family members. 

This structure often has the advantages of:

1. To reduce due diligence requirements as the key employees normally already have significant business knowledge.
2. Allows for a more gradual transition of the business owner out of the business with shares being purchased over time and
3. Higher likelihood of vendor financing reducing the need for bank financing.

If you want to discuss your business transition, contact me at rob@covenant.ca.