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The Question of Transferable Value

As a business attorney, one of my most important jobs is to guide clients in the execution of their exit strategy. Long ago, however, I realized that attorneys engaged to assist in this regard are like flowers at a funeral – they always arrive too late.

In the column I recently turned in for the June issue of SmartCEO[1], I quoted a proverb (that I could have sworn was given voice by Winnie the Pooh) that “the best time to plant a tree is 20 years ago; the second best time is today.” Nothing more true than this could be said about planning one’s exit strategy.

I was reminded of this yesterday at lunch with Mark Cissell, CEO of Katz Abosch, one of Maryland’s leading accounting, valuation and consulting firms. We discussed the question of what I call transferable value – meaning whatever it is that gives value to a business in its sale to an unrelated buyer.

The question was first brought home to me many years ago when I served as seller’s counsel for a massage therapy business. The business had provided a good living for my client, but she had tired of it and wanted to sell. She had 4 massage therapists, excluding herself, and had visions of riding off into the sunset after closing.

But massage therapy is one of those businesses that lives or dies on personal service. There isn’t much inventory or equipment to speak of – maybe some lotions for resale, tables and such – but nothing that would fund a stress-free retirement.

The question that I couldn’t quite wrap my head around was “what does my client actually have to sell?” The clients were not loyal to the sign on the door; they were loyal to their chosen therapist. What was it that a third-party buyer would pay a premium for?

The answer, as it finally occurred to the buyer, was “not much.” I urged my client to take a longer road, turn down the deal that was offered, and work to transition her business to her therapists while consistently building her brand. She refused, having set her time table for withdrawal.

In the end, she did get out. Her proceeds were much less than she had hoped for and she still had to spend time to transition business to the buyer in order to maximize her earn-out. Even then, she had to fight to retain her therapists (and their business) as she had not locked down her streams of revenue in advance.

My client was an entrepreneur – that species of person I admire in business like no other. She did what so few people in our society are actually capable of doing. She built her living from a business of her own creation. I hope the readers of this blog appreciate how rare and special that is.

Unfortunately, she made a critical mistake. She allowed front-burner issues to consume her, rather than step back and focus down the road on her exit strategy. In so doing, she fumbled the ball at the goal line. She lost her best opportunity to cash in on her years of hard work on her own terms.

She failed to consider the question of exit strategy and transferable value.

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[1] Check out the April issue of SmartCEO for my previous column…then let me know your thoughts.