The Business Owners’ Special Series (B.O.S.S.) No. 32
By Rich Gunn, Partner, Advisory
It is a well-known fact in the exit planning profession that early-stage exit planning can dramatically increase business value. This means exactly what it says: given two otherwise identical business, whereby one business engages in early stage-exit planning and the other does not, and both companies are sold five years later, the business that engaged in early-stage exit planning will sell for a much higher price. That price difference can potentially be millions of dollars. Yet, the vast majority of business owners forego the value-building process of early-stage exit planning. As a result, when a sale transaction knocks on their doors, their business is not exit-ready, and the sale price falls far short of its highest potential price.
Early-stage exit planning is the process of looking at your business through buyer’s eyes and identifying opportunities to enhance value. It also means identifying areas where buyers will find risk, because each additional risk a buyer identifies, it drives down the price that they are willing to pay, and buyers find risks in areas that you may never see. A Certified Exit Planning Advisor (CEPA) is well-trained and experienced in seeing your business through buyer’s eyes, and they can lead you through a strategic and thorough value enhancement process.
In other words, effective early-stage exit planning accomplishes two critical objectives:
- Your business will be sale-ready at all times.
- Your business will command the highest potential price.
Now that you know the benefits of early stage exit planning, you should ask yourself: “Why haven’t I started exit planning for my business? What’s holding me back?” Let’s explore some of the common barriers, and perhaps you can identify your personal barrier, hurdle past it, and move on toward this paramount process of exit planning and value enhancement.
“I Won’t Exit My Business for Many Years”
Congratulations: you are in the best position to begin early-stage exit planning! Many business owners go into panic-overdrive when they choose to retire and exit their business. They often discover their business has a lower value than expected, and there isn’t enough time to significantly improve value. You can easily avoid that scenario because you are not planning to exit any time soon. Starting now, you can go through the value enhancement process of exit planning at a well-planned pace and maximize your ultimate exit price.
Furthermore, many business owners discover that their timeline to exit is much sooner than they anticipated for several reasons:
- Opportunity: If your business is attractive, it’s highly likely that a buyer will knock on your door and offer to buy your business long before you planned to sell. The price offered may tempt you to exit early because you think the price offered is a good one. However, the difference between a good price and a great price, can be millions of dollars. Proper exit planning will find value enhancement opportunities and result in a great price. Don’t put a discount on the value of your business by postponing exit planning and selling your business for less than the highest potential price.
- Winds of Change: I’ve heard many business owners say “I did not plan on exiting for many years. However, the dramatic changes in my industry will require me to invest a significant amount of money to retool my business if I want to stay in the game. The investment is too large, and I need to get out now or I won’t survive.” Early-stage exit planning will enhance business value and assist business owners in commanding a higher price at exit, regardless of the reasons for selling.
- What If You’re Not Here Tomorrow? We see many business owners suddenly taken away from their business due to unexpected physical and mental health issues, sudden disabilities, and premature deaths. These are real risks that we all have to consider and plan for accordingly. For a business owner, however, it’s more complex: You must take extra steps to make certain that business value is protected for the benefit of your loved ones in the event that you are suddenly unable to run the business. Effective exit planning identifies ways to protect and preserve the value of your business for the benefit of your loved ones: This planning should never be put on the backburner.
Fear of Future
Many owners are so engrossed in their business, it’s difficult to imagine life without the business. In fact, it can give rise to many highly uncomfortable thoughts, causing many owners to avoid thinking about their eventual exit. Here are a few examples of business owners’ consternation.
- Fear of not knowing what to do with their post-exit life
- Fear of boredom
- Concern about loss of status or stature in the community
- Fear of losing relationships that are directly connected to the business
- Fear of losing a social life that is centered around their business
- Fear of not knowing what is going to motivate them to get out of bed every day for the next 30 or 40 years
Fear of uncertainty of what life will look like without a business is real, and it’s the elephant in the exit planning room. Transaction advisors fail to grasp this concern and offer very little assistance. Business owners are uncomfortable thinking about it, and so they push it out of their mind instead of confronting it, and effectively addressing it with a personal exit plan. However, planning for a post-exit life is a manageable process: It can be anticipated and planned for. Effective exit planning is not only about preparing the business for exit: It’s also about preparing the owner for a post-exit life.
Think about which of these fears may be real for you. Decide what it would take to get over that fear in a post-exit life and begin practicing those tactics now. Test them. See if they are effective. Look at your future, your post-exit life, and bring it into the present. Begin practicing your post-exit activities and see how effective they are for you and if they will be sustainable for years to come. Review, revise and strengthen these plans as you go. Practicing in the present can take the fear out of the future.
It’s very easy for business owners to immerse themselves in the details of day-to-day operations and therefore, avoid thinking about planning for their inevitable exit. This is the “head in the sand” approach to running the business. When you are completely immersed in day-to-day operations, leaving no time for strategic thinking, this is a sure sign that the business is overly dependent on you. This is a major reason why buyers offer far less than an owner expects in a sale price. A business that cannot operate without you has far less value than a business that can.
Your first step is to recognize that this is your procrastination hurdle to exit planning. As you begin to move those day-to-day activities off your plate and transfer them to employees, you have taken a huge step forward in two major ways. First, you have enhanced the value of your business by making your business less owner-dependent. Second, you will spend less time on the tactical side of the business and have more time to be strategic and focus on enhancing business value while effectively exit planning.
“I Don’t Have the Time”
If you were offered $5 million dollars to simply find a few hours in each week to devote to exit planning, would you find the time to do it? What if you were offered $10 million? Or $20 million? If you said “Yes, I could find the time, given a multimillion-dollar incentive,” then you should stop what you are doing and begin exit planning immediately. An effective exit strategy is a process that identifies value enhancing opportunities, so that no matter when you exit, your business is worth far greater than its current value. Depending on the size of your business, strategic exit planning could enhance business value by millions and often tens of millions of dollars more when you exit your business (which you know you will eventually do).
“I Don’t Know How to Get Started”
Begin with a commitment to devoting a few hours each week to focus exclusively on exit planning. Put a few “do not disturb” hours on your calendar, close your door, turn off your email and instant messaging apps on your laptop, and turn off your cell phone. Then, begin to think about how you can be more strategic and less tactical in how you spend your time.
One major goal is to make the business independent of you in all functional areas. You are strategic. Your employees are functional. Make list of all the functional or transactional matters that you do. Add to the list every time you realize you’re doing a functional task. The next step is to identify who can be trained to do that same task. With some tasks, its a matter of delegating and training. In other cases, it may be developing a process that others can follow. With larger more complex matters, it may be a matter of hiring the right person. The point is that you need to develop all functional areas of your business to operate without your assistance. Then you will have a business that will command a price at the higher end of the price spectrum.
Exit planners look at over 100 different ways to enhance business value for our exit planning clients. Developing the functional areas so that they can run without you is only one, but if do only this one thing, you will have a huge head start in enhancing your business’s value.
“I Don’t Know Where to Get Help”
This is a common problem, and it frustrates business owners when their business advisors offer little assistance in in exit planning. This is because many advisors are actually transaction specialists, and they don’t make significant money unless there is a sale transaction in the immediate future. Hence, they don’t care to be involved in the early-stage value enhancement process of exit planning. This is a shame because the earlier you start, the higher the price will be when you are ready for a sale transaction.
Certified Exit Planning Advisors (CEPAs), however, are experts in exit planning and they will analyze your business for value enhancement opportunities and assist with the implementation. Strongly consider adding a CEPA to your business advisory team.
“Professional Fees Are Expensive”
Some professional fees are painful because they are necessary and expensive, yet they add very little value. An example of that would be hiring a professional to assist you in merely proving to a government agency that you are in compliance with their agency’s mandates. Exit planning does not fall into that category. Dollars spent on effective exit planning will provide a huge return on investments. The following is a simple example.
Let’s say your cash flow from operations has consistently been $5 million per year for each of the past five years. In researching recent sale transactions in your industry, you see that some businesses have sold for four-times earnings, while some have sold for six-times earnings, and some have even sold for eight times earnings. For a business with $5 million in earnings, that means that the sales prices have ranged from $20 million for a lower value business, to $30 million for an average value business, to $40 million for a best-in-class business. There is a $20 million dollar price range from low value businesses to a best-in-class businesses. Effective exit planning identifies opportunities and action steps to move your business from a low value or average value to a best-in-class operation. If your business could make a $50,000 investment in effective exit planning and, as a result, increase your business’s sale price by $10 million or $20 million, it would be a highly profitable decision to do so.
Remember that there is no magic wand that will result in huge increases in your business’s value over night. You need to make an investment in a strategic exit planning process, and the process takes time. If you get an early start on the process, and invest the time and attention it deserves, significant value enhancement will be a direct result.
Every owner will inevitably exit their business and they may exit when they least expect to. Effective exit planning accomplishes several critical things. First, it makes certain that your business is exit ready at all times, because life is unpredictable. Second, it is a value enhancement process, so that it increases value and sales price regardless of when, or why, you exit your business. Third, it protects business value for your loved ones in the event that you are suddenly taken away from your business by unforeseen circumstances. Finally, the earlier you begin the process, the more time you have to pursue value-building strategies. Start now. Every day you delay is another missed opportunity to enhance the value of your business.
Discover More Exit Planning and Value Acceleration Insights
This article is No. 32 in the Business Ownership Special Series (B.O.S.S.), an ongoing cycle of informational guides from BPM designed for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business, delivered each month straight to your inbox. For more insights, download our e-book, “Value-Focused Business Planning,” and check out the rest of our B.O.S.S. articles.