InSight

Exit and Growth Strategies for Middle Market Businesses

The Death Discount

By Patrick Powell | Jul 25, 2019

I recently had a conversation with a middle-market business owner who asked me about the value of an enterprise when the generation 1 owner (founder) passes away.  I walked him through a buyer’s perspective of how the business typically suffers a loss of value due to the loss of intellectual capital.  According to Wikipedia, “Intellectual capital is the intangible value of a business, covering its people (human capital), the value relating to its relationships (relational capital), and everything that is left when the employees go home (structural capital), of which intellectual property (IP) is but one component.”

I told him that I call it the “Death Discount”.  My apologies for the lack of tact, but this is a business blog.  How is it valued?  That depends on the buyer’s analysis, but don’t be shocked if it is up to 30 percent.

So, how does a business owner convey his or her intellectual capital to the business in way not to suffer loss at the end of the owner’s life?  Depending on the type of business, this can be exceedingly difficult.  The answer begins with a developing a thoughtful intellectual capital transfer plan.  Working with a business consultant can be helpful, because you want an outside view and analysis of the very important things that are not obvious, i.e. not on your balance sheet.

These things include the answers to questions which begin with “Who do I call when ________ happens?”.  In many businesses there are simply formulas which may be unrecorded to trigger a business founders’ decision to buy or sell property or other assets such as inventory.  Making these decisions timely may have contributed to the business’s profitability and in turn value.

The list of these intellectual capital items should be identified in your plan and documented to the best of the owner’s ability in order to transfer the value to the next generation of owners.


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