Business Owners’ Special Series #11
Business exit planning is one of the most important strategies an owner can make, yet the statistics are startling: 70% of businesses that go to market do not actually sell. Of those that do sell, 75% of owners express significant regret within a year of the sale. That leaves a mere 7.5% who actually sell their business and have few regrets. So why is there a 92.5% failure rate for business owners exiting their business? Failure to prepare is the common answer, but most will admit they know they need an exit strategy business plan. So what is standing in their way? They are missing proper motivation, a plan and a process.
The Motivation to Begin Business Exit Planning:
Motivation to begin business exit planning is the first barrier. It’s not that business owners lack motivation, they have plenty of motivation around working in the business, but we are talking about the motivation to work on the business. Most owners need to understand that working on the business means finding the time and will to grow the business value and to prepare for an exit. Start by looking at the business through the eyes of a buyer. A buyer’s approach to valuing a business is typically different from how the business owner perceives value. Understanding how a buyer perceives a business helps to identify areas that need to be addressed to facilitate a successful transition of ownership. It also helps to identify the value of the business in the market, which might expose a value gap between what the business is worth and what the owner needs to retire. With this understanding, business owners are more likely to have the proper motivation to focus their energy on making changes to their business that will grow its value and prepare it for a transition. What business owners need next is an effective exit plan to tackle the obstacles ahead.
The Exit Strategy Business Plan:
Once business owners have the proper motivation, they need a plan to make achieve their goals. A Value Acceleration Plan designed by a Certified Exit Planning Advisor (CEPA) can help outline what the business owner needs to do. It focuses on five key steps needed to increase business value and prepare for their exit:
Step 1: Identify Value
Identify the current value of the business. This includes determining what the current market value is, as well as reviewing the business processes and procedures to determine where value can be added. Owners need to practice reviewing their businesses through the eyes of a buyer.
Step 2: Protect Value
Reduce the risks identified during step one, while thinking about the business through eyes of a buyer. De-risking the business is a critical step in effective exit planning, because risks reduce business value. De-risk by understanding the hazards of the business and make sure the proper insurance is in place, as well as look for ways to diversify the customer base to avoid concentrations.
Step 3: Build Value
Create and build value by further developing the value drivers identified in step one. Spend time increasing the intellectual capital in the business by building up the customer, structure and social capital. The more owners fortify and document their processes, the more turn-key the business becomes, which increases value to the owner and a potential future buyer.
Step 4: Harvest Value
Harvest existing business value by understanding all exit options. Most owners know of one or two, but that limits their options and could result in them leaving value on the table when they exit. Increase the likelihood of a successful exit by taking the time to understand every option.
Step 5: Manage Value
“Manage value” means managing the value gained from an exit and managing expectations, including expectations of value of the business as well as what life post-exit will look like. Manage expectations and goals throughout every step of the exit planning preparation process for post-exit fulfillment, instead of regret.
The plan is the ‘what’ that needs to be done, but owners also need the ‘how,’ which is the process.
The Business Exit Process:
The third barrier business owners confront in exit planning is the lack of understanding how to implement the steps above. The best option is for an owner to work with a CEPA to help guide them through each step. First, prepare, or have a CEPA prepare, an assessment of current and potential value of the business, to inform the creation of realistic value goals and financial targets. Then a deep dive diagnostic should be performed on the business, which should be done by a third-party professional, such as a CEPA. Owners tend to be too close to the business to perform this process well. It includes a review of all the policies, procedures and processes – written and implied – to work on the Identify Step in the plan above. This diagnostic identifies the business’ strengths, weaknesses and risks in the eyes of a buyer. Using the results, owners should create an action plan that identifies where to protect and build value, as well as how to prepare the owner for life after exit. Here it’s again helpful to have a CEPA involved. They can help organize the action plan and keep progress on track. Without the help of a CEPA, owners should try to make the changes manageable for them. They should break identified action items down into 90-day goals. Each 90-day goal should be assigned to the appropriate person, including the owner, key managers, family members or outside advisors. During that 90-day period, progress on each item should be monitored. If progress on an item is slow, identify and remove barriers to keep things moving forward. Each successfully completed action advances business value.
After completing all of the action items identified through business exit planning, the owner will be prepared to leave the company. However, having a business exit plan doesn’t mean the owner has to sell or leave the business any time soon. They can take comfort in knowing they can harvest the value of their business on their own timeline, knowing they are now ready for a successful exit at any time.
Why Start Now:
Effective exit planning has a compounding effect. The sooner an owner begins the process of Value Acceleration, the higher the value the business will achieve when they exit. The savvy business owner, one who maximizes business value and reaps the highest financial reward, can say:
“I am not selling my business now, but I want make certain my business is ready for sale at all times. How do I do that?”
The most prudent thing a business owner can do is to start business exit planning now.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.
The Business Owners’ Special Series (B.O.S.S.):
The Business Owners’ Special Series (B.O.S.S.) is composed of several informational articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.