fbpx

Not all businesses are created equal. Some businesses have so much value tied up in the owner that no buyer can replace the owner. If the business and the owner are inseparable, then it is unlikely there is a buyer who is willing to buy the business.

You can think of businesses in the one of two ways that they generate value for their owners: ‘equity’ businesses and ‘cash’ businesses Business value can be commercial and transferable. This is an equity business.  Business value can also be non-transferable, representing value-to-owner. This kind of business is a cash business. It still has value – sometimes lots of value. In both cases the value of the business accrues to the owners (shareholders) of the business, but one is sellable and the other is not. 

Balance-Scale_equity-cash

Nancy’s Business

Let’s meet Nancy, the hair stylist. Nancy has an excellent relationship with her clients. She has had an uncanny ability to move between salons, bringing her clients with her every time she moves. As a result, this popular stylist has a really great business. She gets lots of referrals business from her clients. She carefully curates her client list upgrading those who make frequent appointments for expensive services. Nancy is careful about her expenses. She balances carefully the cost of her supplies with the quality. Her clients love her, giving her great social media reviews.

She makes a good living as a stylist and has a great business. A business valuation would show high discretionary after-tax cash flow resulting from consistent, increasing revenue and diligent attention to costs. The business is a great business… for Nancy.

If she sold her business, what’s it worth? In this case, not as much as you think.

So what’s the problem? Nancy’s business relies so strongly on her personal relationships with her clients that it may not be commercially transferable. A potential buyer will be unwilling to pay very much for this business. If Nancy tries to sell the business, the buyer will rightly assume that Nancy’s clients will likely migrate to Nancy’s newest location or will disperse into the ether.

Piggy Bank

Value to Owner

Because Nancy’s business is inseparable from Nancy, the business has non-commercial, non-transferable value or value to owner. Nancy should concentrate on banking her cash while she is working. She is unlikely to find a buyer for her business.

Tagged with:  
Share →