A comprehensive business exit strategy considers the transaction for the transfer of business ownership through succession planning, M&A, management buyout, or share sale. In addition, it looks at ways to maximize the value of the business to make it as attractive to potential buyers as possible.
A business owner wants to sell their business for the best price possible. To do this, they calculate their company’s current value and compare it to the value they need to achieve before the sale. In most cases, there’s a difference between the two values, known as the “value gap.” Strategic value growth initiatives are then implemented to fill that gap and reach the value needed to fulfill the owner’s exit goals. Filling that gap to achieve value goals generally takes several years.
If you haven’t thought about planning your exit, you need to do so now!
The Exit Planning Process
Exit planning is the complete strategy to help a business owner exit their privately held company. Even if a business is doing well, its owner will eventually want to leave. An exit plan plots the route for the business owner to leave the business by either selling the business or leaving it to successors, management, employees, etc.
During exit planning, an in-depth analysis of the business’s financial, legal, operations, and processes are conducted to identify areas where strategic growth initiatives can be implemented.
Elements of a Business Exit Strategy:
- Objectives: What are the business owner’s exit goals and priorities? Are they keen on reaping the profits from the business exit or leaving a legacy? It’s essential to first understand the purpose of the business exit before making an exit plan.
- Timeline: When does the business owner plan to sell the business? Is the time frame sufficient to build business value and fulfill the exit goals? Is the timeline flexible? A flexible timeline grants the business owner more negotiating power; however, if there is no room for flexibility, the chances of the sale not going as per the plan are high.
- The future of the business: Does the business owner want the business to continue or be dissolved? What the business owner plans for the company determine if the exit occurs through M&A, liquidation, sale, or succession plan.
- Market conditions: Is there a demand for the business’s products or services? How many potential buyers are there? These factors help to determine the market demand for acquiring a business.
Business Valuation in Exit Planning
Many business owners do not consider the business exit the end of their professional journeys. Instead, they view it as a stepping stone to new ventures, learning new things, or continuing their personal growth. To accomplish these end goals, they need to maximize their money from their business exit.
The first step in this direction is business valuation to understand the company’s current market value. Once this value is linked and compared with the business owner’s post-exit financial plan, they will know if their exit will fund either retirement or their next venture. More than likely, business valuation reveals a value gap. An exit plan ensures that the value gap is reduced as much as possible until it is time to exit.
When acquiring a business, buyers consider the risk involved. High-risk companies are worth much less compared to low-risk companies. To increase the business value, it’s essential to “de-risk” the business.
The objective of an exit plan is to build business value separate from the business owner. This effort involves mitigating or eliminating risk so that even when the business owner leaves the company, the value remains with the company.
Business Valuation and Building Value
For a business owner, the business is their most significant asset in which they have invested a lot of time and money. To harvest that wealth, the business should increase its value until it is time to sell.
Buyers want to see a business with an organized exit plan. Such an exit plan primarily focuses on building value through strategic growth initiatives, and de-risk the business. De-risking begins by conducting an overall assessment of the company: business valuation.
The primary aim of the assessment is to identify management’s strengths and key revenue drivers and appraise the business contracts. Once the weaker business aspects are identified, a strategic plan is implemented to address them. Eliminating the more vulnerable areas of the business builds value that can be transferred to the buyer.
Succeed with Assistance
If executed correctly, an exit plan helps smooth the ownership transition, builds the company’s financial health, and increases the chances of a profitable business sale. Moreover, even if one considers market competition, a well-run business is more attractive to prospective buyers. Savvy business owners retain the services of an exit planning advisor to make and implement an exit plan to build the business value.
Since most of a company owner’s wealth is tied up in business, it makes sense to have an experienced, impartial advisor by their side to assess the company’s strengths and weaknesses to develop and implement a plan that optimizes the company’s performance.