Every business owner will, at some point, exit their business in some way. Most, however, do not think about how they will exit until they are almost ready to do so. I have found that most business owners are so engrossed in running their business that they don’t think about selling until six months before they want to exit. Unfortunately, this is a poor strategy. Effective exit planning takes time.
A survey was conducted by the Exit Planning Institute in partnership with Grant Thornton, PNC and the Ohio Employee Ownership Center at Kent State University. This “State of Owner Readiness Survey” found that 75% of owners who sold their businesses had “seller’s remorse” because they felt as though they did not receive a fair monetary value and were not prepared for the emotional impact of selling their business. Seller’s remorse can be rectified by beginning to plan for the exit transition three to five years before an owner wants to exit.
The typical exit plan will determine an “attractiveness score” and a “readiness score.” These scores reveal the areas of improvement needed for a successful transition. The attractiveness score indicates what is needed to make the business attractive to a buyer. The readiness score addresses three questions:
- Is the business at its ultimate value?
- Is the owner ready to sell?
- Does the owner have an adequate financial plan?
The goal is to utilize information from the attractiveness and readiness scores to determine what actions need to be taken to build the company to its maximum value over three to five years, no matter what type of exit the owner chooses. An added benefit of this process is normally an increase in profits and cash flow during the growth period because of the actions taken.
Build Business Value as Part of an Exit Plan
The focus of this column is on building the business value. How, specifically, to do this varies from business to business based on many factors. But the end goal is the same – to create an entity that will provide maximum value to the new owner or owners and create the maximum exit return for the current owner.
First, creating maximum value involves increasing revenue and the bottom line. Achieving these goals may involve increasing sales and marketing efforts utilizing techniques that maximize ROI. Other initiatives may involve expanding into new markets or diversifying the company’s product or service offerings. Any of these actions or other growth initiatives will require capital, so it must be determined where this capital will come from before beginning any growth efforts.
Here are a few options.
- Current assets: Is there cash on hand, or are there other liquid assets available? How much is available? What are the risks versus the returns of using these assets?
- Cash flow: Is cash flow being maximized by the effective management of accounts receivable, payables and inventory? More cash on hand can be used to fund growth.
- Capital raising: Is there a potential to raise debt or equity financing? This is a complicated issue – exit implications of capital raising must be carefully considered. It can have a serious impact on the market attractiveness of the business if not managed correctly.
Second, growth must be managed. Increasing revenue will require an increased ability to fulfill orders, additional customer service and other potential expenses. Third, the company needs to have a sustainable competitive advantage, and that advantage should be strengthened as much as possible. Fourth, making the business attractive to the market will require a stable and experienced staff who will likely stay after a change in management.
Finally, the business’ reliance on the owner must be considered. If the expertise or customer relationships of the owner are vital to the business, there must be a plan to transition these to another key manager or to the new owner.
The value-growth initiatives we have discussed are not all-inclusive and must be part of a comprehensive plan, the formation of which requires the skills of an experienced professional. This plan, again, must be created and initiated at least three to five years before the expected time of exit.