Transferability of a Business?

Transferability of a Business  Business

When business owners think about selling, they often focus on their EBITADA or their top-line revenue not how transferable is the business to a new owner. And, a high-revenue business isn’t necessarily a “sellable” one. Statistically, the transition is fraught with risk: 60-80% of businesses fail to thrive or stay in operation after a sale.

The primary reason for this high failure rate is a lack of transfer-ability. If the value of the business is tied to the owner rather than the system, the value disappears the moment the owner walks out the door. To ensure your business is transferable to a buyer, you must evaluate how “personal” your operations are across several key criteria before starting, buying or selling a business.

The Business Name: Brand vs. Person

If your company is named “David Smith Consulting,” you are facing a significant transfer-ability hurdle. A name that is too personal suggests to the market that the expertise resides solely in the individual. When the name is generic or brand-focused, the buyer inherits an entity that can stand on its own.

  • Example: A law firm named “Johnson & Associates” is harder to sell than a firm branded “Metro Estate Planning,” which suggests a repeatable process rather than a specific person’s genius.

Operations: Complexity vs. Simplicity

Buyers look for “turnkey” operations. If your business requires a “mad scientist” at the helm to keep the gears turning, it is likely too complex to transfer. Simple, documented systems (SOPs) allow a new owner to step in and maintain momentum without a five-year learning curve.

  • Example: A manufacturing plant where the owner is the only one who knows how to calibrate the machines is a liability. A plant with digital manuals and a trained floor manager is an asset.

Sales and Marketing: Personal vs. Generic

If you, as the owner, are the “Rainmaker” who closes every deal through personal handshakes and decades-old friendships, the business has no predictable future revenue for a buyer. Transferable businesses use generic lead-generation systems—like SEO, automated funnels, or a dedicated sales team—that don’t rely on the owner’s charisma.

  • Example: A graphic design agency where the owner lands every client at golf outings will see sales crater post-sale. An agency with a consistent inbound marketing funnel is highly transferable.

Hiring and Culture: The “Tribal Knowledge” Trap

Hiring becomes a bottleneck when the criteria for a “good employee” exist only in the owner’s head. If your hiring process is personal—based on your “gut feeling”—a buyer won’t know how to scale the team. Generic, systematized hiring and training programs ensure the culture and talent level remain consistent after the transition while moving towards the ideal business organization.

  • Example: A restaurant where the owner “just knows” who to hire as a server rarely survives a sale as well as a franchise-style model with a structured interview rubric and training manual.

Products and Services: Bespoke vs. Standardized

Highly personalized, “bespoke” services are difficult to transfer because they usually require the unique touch or oversight of the founder. Standardized products or service packages are far more attractive because they are repeatable and scalable.

  • Example: A custom woodworking shop where the owner hand-sketches every design is difficult to sell. A cabinet company with five standard, high-quality styles that can be produced by any skilled carpenter is a far more stable investment for a buyer.

Other Vital Transferability Criteria

Beyond the categories above, consider these two factors:

  • Customer Concentration: If more than 20% of your revenue comes from a single client, the business is “personal” to that client. If they leave because you sold, the buyer loses the business.

  • Vendor Relationships: If your supply chain depends on your personal friendship with a vendor rather than a formal contract, the buyer may face price hikes or supply issues the day you leave.

    Case Study: The “Master Plumber” Contingency

    Location: Suburban Ohio

    Industry: Residential & Light Commercial Plumbing

    Entity: Reliable Flow Plumbing, LLC

    Background

    Reliable Flow Plumbing had maintained consistent performance, posting $250,000 in annual sales for two consecutive years. The team consisted of the owner (a Master Plumber) and five employees: three journeymen and two apprentices. Despite a solid reputation and steady cash flow, the business faced a significant hurdle when the owner decided to retire.

    The Problem: The Licensing Barrier

    A motivated potential buyer emerged with a strong background in operations and marketing. However, the buyer was not a Master Plumber. In this jurisdiction, a plumbing contractor’s license—and the ability to pull permits for large-scale work—was legally tied to the individual holding the Master Plumber designation.

    Without a Master Plumber on staff to serve as the “License Qualifier,” the business could not legally operate or maintain its professional accreditation after the sale. This created a “Key Man” risk that threatened to devalue the entire company.

    The Strategy: Stewardship Transition

    To bridge this gap and ensure an honest, functional transition (as outlined in the Stewardship Transition Guide), the Seller and Buyer negotiated a two-phase solution:

    1. The Seller-Stay Agreement: The Seller agreed to stay on for one year post-close (or until the Buyer/a senior employee obtained their Master License). This ensured the work remained “professional and accredited” during the hand-off.

    2. Valuation Adjustment: By moving toward an ideal business model before the purchase, the Buyer realized that the business was overly dependent on a single individual. Because of the inherent risk—specifically the difficulty of finding and hiring a replacement Master Plumber in a tight labor market—the business value was adjusted downward to reflect the operational risk.

    Implementation Table

    Phase Action Item Purpose
    Pre-Sale Audit Documented all active permits and license requirements. To identify the legal “single point of failure.”
    Operational Shift Seller began delegating “License Qualifier” oversight to a senior journeyman. To test if a current employee could eventually bridge the gap.
    The Year of Stewardship Seller remained as a consultant/Master of Record. To guarantee legal continuity and mentor the new owner.
    The Final Certificate Successful transfer of the license to the Buyer or a new hire. Formalizes the end of the transition and the Seller’s exit.

    Key Outcomes

    • Risk Mitigation: The Buyer avoided the “black swan” event of purchasing a company that could not legally operate on Day 2.

    • Professionalism: By following honest dealings, the Seller was transparent about the licensing bottleneck rather than hiding it until the due diligence phase.

    • Sustainable Growth: The one-year transition allowed the five employees to adjust to new leadership while the technical quality of the work remained under the Seller’s expert oversight.

    Lessons Learned

    This case illustrates that technical accreditation is as much an asset as revenue. For a business with $250k in sales, the loss of a Master Plumber isn’t just a hurdle; it is an existential threat. A structured stewardship period preserves the value of the “work” while allowing the “business” to change hands.

The Bottom Line: To join the successful 20-40% of business transitions, you must spend the time leading up to your exit “depersonalizing” your success and other key factors. Take the FREE Business Transferability Assessment.  The less the business needs you, the more valuable you are to a buyer. How close is your business to being transfer-ready? Get an online complimentary assessment with an experienced Advisor. Read more about the principles and laws of business value that affect nontransferable businesses.