Business Owners’ Special Series #9
The process of business exit planning can be really overwhelming, which is made worse by the volume of misinformation in the market on the subject. Business owners are often even misinformed by their most trusted advisors. These advisors aren’t intentionally misleading clients. They are often just focusing on executing a transaction, instead of the actual exit planning. To help clear the fog, here are some of the most common misleading statements we hear advisors tell their clients when talking about business exit planning:
“Call me when you are ready to sell your business.”
This is one of the most common statements professional advisors tell their clients, when asked about exit planning. This approach neglects to advise a business owner on things they can do well before a sale to set them up for a successful exit. Selling a business is only one piece of a thorough exit planning strategy and it comes at the end of the process, not the beginning. Proper exit planning is a strategic plan to grow business value and align exit goals, so an owner is ready when an exit occurs. They are able to be proactive instead of reactive and exit the business on their terms. If an advisor wants to begin exit planning “when you are ready to sell,” then they do not understand the purpose and the process of authentic and practical business exit planning.
“You don’t need more than two or three years to plan your exit.”
Three years to prepare a business for sale is certainly better than three months. However, advisors who say “three years is sufficient” are oblivious to the compound effect of comprehensive exit planning strategies. The best time to begin preparing a business for sale is when the owner is not even contemplating a sale. This way, they have plenty of time to take a step back to work ‘on’ the business, instead of ‘in’ the business. Early business exit planning allows an owner to identify all the areas of their business that can result in an average or lower-than-average price from a buyer, take action, and therefore prevent the business from being undervalued. Business owners who go through a Value Acceleration process with a Certified Exit Planning Advisor (CEPA) are well-educated on what it takes to maximize value and have a practical plan to do so. Furthermore, in pursuing the process of Value Acceleration, business owners often feel reenergized about their business and see the increase in value their actions create.
“In your industry, buyers pay six times earnings.”
Buyers do not make business acquisition decisions based on “rules of thumb” purchase pricing. Implying they do is misleading. Buyers ultimately determine the price they will offer based many different factors. These factors include: how transferrable the business is; the strength of its financial performance; the competency of its management team; its position in the market place; the effectiveness of its systems and processes; and the risks of the business. All of these things are uncovered by a buyer during the due diligence review. Determining the ‘right price’ is far more comprehensive than any rule of thumb.
However, let’s say for the moment that you look at recent acquisitions in your industry and you see a common trend in the price paid for similar businesses. Let’s assume you do find the average sale price does, in fact, seem to be six times earnings. In that case, you have to ask yourself “Do I want to sell my business for the average price?” or “Do I want to sell for the highest price?” If you want the highest price, you need to commit to a plan that will result in accelerating the value of your business above average. The advisor who wants to sell your business for the average price is not the advisor you want on your team.
“I can tell you exactly what your business will sell for, right now.”
Advisors use this misleading statement as an attempt to impress business owners and to create an illusion that their understanding of business value is omniscient and indispensable. No one can tell an owner what their business is really worth until they have reviewed and analyzed a significant amount of information about the business. Even then, an advisor cannot guarantee they can find someone to buy the business at that value. Even a motivated buyer does not know what they will pay for a business until after they have completed their due diligence review.
This statement about ‘knowing the value’ misses the whole point of exit planning. Exit planning is not about what a business is worth today. It is about achieving the highest potential value, while aligning the exit to the goals of the owner. Most advisors do not have the time, patience, process, motivation or skills to do this type of rigorous exit planning. That is why we use the term Value Acceleration to describe our highly effective exit planning process.
“Yes, I am a business exit planning professional.”
This is not always misleading information, but there are a few follow-up questions business owners should ask when they hear this statement. First, ask for their credentials. Are they a CPA, CVA, CFP, member of the bar, etc.? All of these alphabet soup credentials are impressive, and if the holders of these credentials are good at what they do, an owner may want some of them included in specific areas of the exit planning process. However, these credentials alone do not guarantee they know exit planning. For true exit planning an owner will want to find a CEPA, a Certified Exit Planning Advisor, as this type of advisor is solely focused in implementing strategies that will improve the value of the business and align the owners exit goals to the exit. A CEPA acts as the quarterback of the exit plan, and he or she includes and aligns with other advisors when necessary to get the optimal result for the business owner.
The second question an owner should ask is how the advisor is compensated. If their compensation is transaction based, then their focus is typically on the volume of deals completed, instead of implementing long-term strategies to move a business to its highest potential value before sale. If they are motivated by post-sale services and products, then they probably don’t have the motivation, nor the process, to work on the business long before sale. A Certified Exit Planning Advisor has only this agenda: to help the business achieve its maximum value and align the exit to the goals of the business owner to the exit executed.
Here is the straight talk:
Exit planning is not something business owners do when they think you are ready to engage in the sale of their business. Exit planning is a mindset of focusing daily on how to improve business value, so whenever owners decide to sell, they are confident that they are selling it for the highest potential value. When an owner focuses on effective exit planning, the business becomes the product. It’s a product you will only sell once, and you want to have the confidence to know you did it right, and you will have no regrets. Certified Exit Planning Advisors understand that way of thinking, and we implement Value Acceleration strategies to help owners achieve their exit or transition goals.
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 (BOSS):
The Business Owners’ Special Series (B.O.S.S.) is made up 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. Click here to read previous articles in the series.