“Your key people are all going to retire when you sell the business? Who the heck is going to know how to run the business?????” This is not a conversation that you want to be having as a buyer or seller.
If you are trying to buy or sell a business, you know that the key people who make the business run can be an important part of the value of the business. For most small businesses the value of the company goes home every night and you hope it comes back the next morning. Of course, now the employees may just work from home and not come in but the concept is the same — employees are a huge part of a business intangible value. As a seller, your business has more value if your quality staff is staying after you leave. Your business cannot function without knowledgeable management and trained competent staff that are reliable. Here are 4 ways key people fit into business valuation.
Employees are part of the valuation.
Businesses are people applying processes to make profits. Looking at the basic market method business valuation equation, Cash Flow x Risk = Value, employees impact BOTH sides of the equation. On the one side, employees drive the processes that create cash flow. On the other, the risk of loss of the institutional knowledge that is in your employees heads is a huge factor in the risk component of value.
Employees create value.
Few small businesses make money based on their hard or fixed assets. Yes, you need those assets, but ask most clients why they use a certain business and you will hear, “We use this business because they provide great service.” Great service comes from good people. The price may count, but quality includes the quality of the service your people provide.
Employees are related to growth.
In addition to quality management, more focus is currently being given to mechanics and trained technical staff. The ability to find and keep new trained or even trainable personnel is one of the biggest growth limitations.
People are your value.
While many owners can’t imagine it, the business is not the owner. In fact, in order to have value a business must be able to operate without the owner. Therefore you must keep your people. In a recent post, I explored how you can create value through your employees (which is something you need to do long before you begin selling your business).
When we evaluate businesses, especially for tax and gift purposes, employees represent the single most important factor when calculating a business’s intangible value. This is value that you want to keep for yourself as your business grows or a value you want to include for future partners in or owners of the business.
Contact me today to learn more about business valuation and what your company is worth.
By Greg Caruso, JD, CPA, CVA, The Art of Business Valuation, Harvest Business, LCC.