Price Is Not First — Building The Capital Value Drivers Comes First.
Guiding Principle 8 — Family Business Succession
Quite often discussions regarding succession commence with a consideration of business value and price and get caught in these tracks. Succession is much wider than a sole consideration of price and even if your intent is to sell and exit the business, it is important that you allow your consideration to step out beyond this boundary.
A reference point to bear in mind is that succession is about the compounding of wealth across generations, it’s about transition and therefore requires a much broader consideration than price. Research of best practices reflects that when owners begin to think about succession they start with a priority on sale price but as they progress their focus quickly changes so that price really becomes a secondary issue.
The focus of the succession process when considering the business is better pitched at ‘continuity of the business’ and ‘ongoing jobs for employees.’ No matter what your intent (sell, retain or transfer the business), the focus on these two key goals does not change. A simple way to express this is getting the best sale price is not the first consideration; rather it is an outcome of the focus on continuity and jobs.
Succession is, in this perspective, about underpinning and growing the capital value of the business. This is the business’s role in supporting the compounding of wealth across generations. It is achieved by providing:
- Certainty about the future
- Identifying the capital value drivers of a business and investing in them
- Establishing the right leadership team and governance structure to support continuity.
The expression ‘capital value lies in certainty’ is very true and a good rule to remember. The greater the certainty of future revenue/profits, the less the risk and therefore the higher the capital value.
When the capital drivers are identified, the questions you must ask to ensure they are correctly identified are:
- Do we legally own them?
- Can they be transferred — practically and legally?
- Are they durable — what’s their life?
- Do they deliver greater customer value and therefore competitiveness?
At this level of analysis, the capital value drivers tend to be identified as intangible assets. You have moved past just looking at profit and are now seeking to identify the drivers of these profits. A list of common intangible assets that may be capital value drivers are:
- Agency, licence, franchise and supply agreements
- Brand, trademark
- Copyright, content, images
- Customers, their loyalty and their visits — online and offline
- Data and information
- Designs, blueprints, software, Apps and IP
- Know-how, patents
- Leasehold and domain names
- Lists, relationships, networks, community forums — online and offline
- Trained skilled workforce and the programs to create them.
The second key focus in relation to the business in a succession process is ‘ongoing jobs for employees.’ This often rests in a loyalty to the staff that have helped build the business and a desire to see them provided for through future employment.
However, this second focus is also a key capital value driver of the business. The competitiveness of any business lies in its employees and the relationship built with and by the leaders. Therefore, a focus on ongoing jobs reinforces the relationship with employees and therefore supports capital value.
In a succession process it is important that you do not suddenly jump to conclusions such as, ‘What is the best price for the business?.’ This locks you into a narrow focus and potentially the wrong outcome for your succession process.
This brief video clip speaks into why Price Is Not First:
