- Written by Rick Riebesell
- Category: Concepts
The commentary is about owning a business. The premise is that it is not enough to own and operate a business. The goal of owning a business is to maximize the value derived from that business interest. Although the measurement of value derived by the owner of a business interest is a complicated matter, for the purpose of most discussions the value of the business experience is measured by the personal wealth created by the business. Said another way, notwithstanding a certain preference for a lifestyle involving the activity of owning a certain business, what is received by the owner or the owner heirs at that time of termination of the business interest is the generally accepted measure of value. There are certain axioms, or concepts, that enable a business owner to effectively provide for deriving maximum value from a business interest.
The Concepts are:
1. Business ownership may end at any time, voluntarily or involuntarily.
2. The maximum value for a business will be paid by a sophisticated buyer from outside the business after due diligence where the continued success of the business is not dependent upon the existing owners.
3. For most businesses, it is difficult to arrange a sale of the business for maximum value, and while that effort should be constant, arrangements must be made for the contingency that the ownership of a business interest ends before the sale of the business for maximum value.
4. For most businesses, the present owners of the business constitute the only immediate market for the sale of an interest in a given business.
5. Sales of ownership interests between current owners of the business (inside sales) are not for maximum value, because at some price below the maximum value, the owner often determines that a new business can be created for a better overall return on investment.
6. A buy-sell agreement among the owners of a business insures the values of each ownership interest pending the sale of the business for maximum value to a buyer not currently a part of the business (outside sale).
7. If there is only one owner, it is very difficult to receive value for the contingency termination of a business interest, especially if that termination is due to the death or disability of the owner.
8. After a business achieves profitable operation, a buy-sell agreement should be developed between the owners. The business should be managed to accomplish a sale of the business for maximum value.
9. The buy-sell agreement should be the basis for constant communication between the owners and that decision-making process should result in the creation of a strategic transition planning document, which continually is revised.