The most prized businesses are the ones that have the highest potential to generate recurring cash flow into the future.
Given this, it makes sense to focus on generating cash, right?
No. Not directly anyway.
As it turns out, cash generation is an end, not a means. It is a measuring stick, but not a tool.
Yes, future cash generation is necessary to being highly prized, but it cannot be approached directly. And prior performance does not indicate future performance.
Rather than focusing on cash generation, a better approach emerges from focusing on building transferable value.
The most prized businesses have something other people want, but it must capable of transfer to another owner with sufficient confidence that it will remain intact on receipt.
Let’s take an example. You are a magician and you’ve been a magician as long as you can remember. You’ve built a name for yourself and you’ve got a strong customer base. You generate a lot of cash flow every year. Your business offers something other people want (predictable, recurring cash flow), but it cannot be transferred to another intact. Why? Because the entire business is based on your skills alone. You walk away and the business disappears with you.
Let’s take another example. You are a contractor. You scale up as the project requires, but your business changes dramatically from year-to-year. On average, you generate significant cash flow. You’ve done a good job at building your organization (it runs whether you’re there or not), so it could be transferred to a new owner. But it may not have something others want. You’re in tough business with many similar competitors and your cash flows are highly volatile making new investors leery. It could be a challenge to find someone that sees much transferable value in your business.
These two examples illustrate that the value of a business is not just a matter of arithmetic. By understanding what does create business value both the magician and contractor can come to understand their current situation and what can be done about it.
For most owner-entrepreneurs, the biggest potential for financial reward is in the successful sale of the business. Sure, the business generates a salary and profit distributions, but the potential for profit in the sale to a third party can result in many multiples of a single year’s salary.
To maximize your chances of a successful sale, you can take tangible steps toward creating transferable value. Reach out to Doescher Group to learn more.