Why it makes sense no matter the stage of your business…
This is part one of a two part series on why every business owner should take the time to develop a solid exit strategy.
Exit planning can seem like a useless process until the business owner decides it’s time to exit the business. After all, why in the world would a business owner want to put himself through that effort before it’s really needed?
Let me tick off a few reasons…
- #1 – it takes longer than most business owners think
- #2 – improving the value of the business doesn’t happen overnight – it takes time
- #3 – planning dramatically improves the outcome when the time comes
I could go on…
A well-designed exit strategy opens the doors to possibilities. It can provide options where none previously existed. Most business owners don’t even realize what options they have for exit, but if they build a genuinely valuable enterprise, the options increase exponentially.
In fact, the most important outcome of good exit planning is that a business owner can define the process on their own terms. Transitioning on their terms along with not falling victim to the process helps business owners avoid “risk factors” which is code for lower valuations!
A solid and properly executed exit strategy has at least the following components:
- Identifies and removes risks, some of which may be in the owner’s blind spot
- Provides opportunities to increase enterprise value
- Aligns people to function on the same page
- Provides contingency plans for unforeseen issues
Let’s address each of these benefits briefly.
We all have blind spots. If we know where those blond spots are, we can address and resolve them. There are things like having shareholder and operating agreements and a solid buy-sell agreement if there are multiple shareholders. Many business owners realize they need those but think they will deal with them later and soon forget. Business insurance policies that were set up years prior, and automatically renewed without review, may need to be updated with things like business interruption, cyber security and key man insurance. These issues are all behind the scenes items, but we should also think about other risks in our business that might be easy to solve, like customer or supplier concentration risk and documented processes.
A great exit plan includes finding and addressing these risks in a business, ultimately leading to higher valuations. You can read more about risks in my book – Maximize Business Value or download the free e-book – The Blind Spot: Hidden Risks – What You Don’t Know Can Hurt You – on our website – masterypartners.com.
Creating Massive Value
Great exit strategies include building long-term, sustainable value in the business. This strategy is the component that is missing from most exit strategies, because by the time you actually start taking action on selling, you’re within a year or two of your exit event. That’s just simply too late to increase the value of your business. Building massive value or increasing the value you already have in your business takes time.
Sophisticated buyers won’t believe short term improvements in value. You’ll need to have a solid track record, usually in the form of trailing twelve months (TTM), to demonstrate that what you’ve done is sustainable, and not some short-term blip on the radar. In most cases, it will take several quarters, perhaps even a few years, until all the things you’ve done to build massive value finally make their way to your financial statements and valuation. Let me state this again… IT JUST TAKES TIME!
Most business owners don’t want their employees to know that they are thinking about selling the business. That’s why it’s one of the strongest arguments for exit strategy being good business strategy. When you approach an exit as a business strategy to build value in the business, involving your team is as natural as involving them in their daily job functions. When you set out to improve long term value, you won’t be shy about who knows because a more valuable business attracts the right people to work there.
Finally – let’s talk a little about the unthinkable…
No business owner likes to think about those things that will suddenly and dramatically change their business. We summarize them easily as the 5 D’s: death, disability, divorce, distress and disagreement. Every business should have a plan for what happens in the case of death or disability of the business owner or other key people. Life happens. It is very possible that you or a key member of your staff will become disabled. Ask yourself this question – “If something happens to me, will my family be provided for, and can the business operate without missing a beat?” If you’re like most business owners, that’s one that will stop you in your tracks.
Distress comes in many forms, like a large customer serving notice that they are leaving you or a key employee turning in two weeks’ notice, or a breach of your systems exposing your customer’s data. I could go on and on. And although never a pleasant topic, the divorce of a business owner or shareholder will likely trigger unintended consequences unless you’re prepared for it. All of these would impact a business to a far greater extent than most owners are prepared. An exit plan provides contingencies for these situations, reducing their negative consequences.
So, Stop right now and go download the eBook. You’ll be glad you did!
Next week – we’re going to talk about common myths and misconceptions about business value and exit planning. You won’t want to miss it!
This article is provided courtesy of Tom Bronson. Tom is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. To learn more about Mastery Partners, visit the website – https://www.masterypartners.com/