9/8/2020

By Wayne Rivers, Family Business Institute

I've had the privilege of visiting with thousands of construction leaders over my 31 years, and I've seen a great variety in the conditions of their businesses. Some are magnificent! They have happy employees, happy customers, predictable revenue streams, and strong growth. But they are the exceptions. Most construction firms, sad to say, struggle along putting out a different kind of fire each day with little idea where they’ll be in two or three years. It’s a daily grind that holds out little promise for the creation of transferable value.

What exactly is transferable value?

In a recent Jim Carlisle blog, he defined it as: "What a business is worth to someone else without the original owner." Transferable value, then, is not determined by how well you run your business. It's determined by how well your business runs without you. That is a critical distinction. Your goal should be to develop your construction firm to the point where it goes on whether you, the senior leader, shows up for work or not. It has the potential to become perpetual because it isn’t dependent on only one person.

The Family Business Institute once had a talented consultant named Julian. Prior to working here, Julian’s father-in-law had sold his company and proposed to Julian, "Why don't you identify small to mid-sized businesses that I can buy, and you can operate?" 

Julian set out to find one or more small businesses that they could purchase and operate in their family portfolio. During his timeline of 18 months, Julian identified 22 businesses considered ripe for purchase. How many offers did they actually make, you ask? ZERO! There wasn’t a single company they reviewed which had grown to be independent of its owner. The businesses simply couldn't stand on their own if that person was out of the picture.

Julian’s experience led us to identify seven criteria that a business must have in order to exhibit transferable value:

1.     Customers that are loyal to the company not just to the owner.

2.     Standard operating procedures (SOPs).

3.     A unique niche in business which is resistant to commoditization.

4.     Predictable, recurring revenue.

5.     A proven plan for growth and profitability.

6.     Loyal, motivated employees that will stay with the company and the new owner after the previous one departs.

7.     A super-talented management team.

If you consider the last two items, what transferable value really comes down to is people. If you've got great people, nobody can hold you back. If you don't have great people throughout your organization, that's a constraint, and your future opportunities will be limited.

Here's a self-test. Take a four-week vacation. If you break out in a cold sweat at the mere thought of being away from your company for a month, that tells you that your business probably lacks transferable value. If, on the other hand, you can take a four-week vacation, and your team runs the company seamlessly, that's a great sign! You're well on your way to establishing transferable value.