How the Health of Your Business Affects Your Exit Strategy
Business owners have common misconceptions about exit strategies. They think that exit planning is only for people ready to leave their companies or that they can smoothly exit their business in five years, or that the right buyer will approach them without any effort on their part.
However, hoping that things will happen automatically when the time comes is a good recipe for leaving a lot of money on the table. To avoid losing out, get a clearly defined and well-built exit plan.
What Is an Exit Plan?
Exit planning involves creating a strategy for business owners to exit on their terms. It includes tax, financial, and legal analyses concerning the repercussions of the business exit. It helps maximize the business value when the owner exits, meets the business ownerâ€™s goals (personal and business) and minimizes taxes.
An exit plan gives the business owner peace of mind that everything is taken care of. An expertly designed and implemented exit plan helps the business owner to reduce or delay the tax burden, maximize company valuation, increase sales proceeds, facilitate a smooth transition, and control the terms and timing of the exit.
On the contrary, a poor exit plan (or none at all) may lower the chances of success for both the business owner and the company during and after the exit. It may even contribute to a failed transition.
What Does “Business Health” Mean?
Critical factors in your company determine the health of your business. Get a health check of your business.
A health check evaluates the critical parts of your business, such as employees, financials, marketing and sales, structure, processes and operations, the company vision, competition, customer base, and revenue. Assessment involves questions such as:
- How do you manage your company’s top talent (people)?
- Does your company culture resonate with the principles of your business?
- What’s stopping you from achieving the vision and mission of your company? (You need to identify those areas and make changes.)
- Are your accounting processes accurate, or do they need improvement?
- Does your cash flow cover your business requirements?
- Describe the state of your business’s cash flow. Is it cyclical, seasonal, or steady? Positive or negative?
- Are your production, operational, and logistics activities streamlined? How do you plan to increase their efficiency?
- How effective are your sales, marketing, and business development efforts? What changes do you want to see in them?
Analyze the answers with the help of an expert business advisor to understand your company’s strengths and weaknesses, get an objective view of your current business value, enhance your business plan, and refocus on your goals.
How Does Your Business Health Influence Your Exit Strategy?
The health of your company impacts your exit strategy. For example, if your business is struggling, that can adversely affect the exit plan you may have (or want to create) because a potential buyer does not want to buy an ailing business.
First, get a professional business valuation to understand your business health. It will show you where your company needs help and provide recommendations to fix the issues.
Not-so-good business health may delay your exit date and change your priorities.
Delayed Exit Date
Your company’s poor health delays your exit date, as you now need to do more work to make it exit-ready. If you cannot delay your exit date, you fall short of the time necessary to prepare your company for a successful exit.
This mainly happens to business owners who wait too long to start their exit planning. They often pay to heed an exit plan only when retirement is close, not realizing that it takes nine to 12 months to sell a business, which doesn’t include preparing the business to sell and results in not getting the desired exit.
Ideally, you should begin planning your exit five to seven years ahead of your tentative exit date. When you begin the process, you will understand how much time your company needs to get exit-ready, which may be more than seven years.
Poor company health may alter your priorities in selling your business. It may limit the viable exit options available to you, forcing you to take an exit option that was not your first choice. By not planning your exit in a timely manner, you could miss out on a once-in-a-lifetime opportunity to cash out the years of hard work and dedication you put into your business.
How Can an Exit Plan Improve Your Business Health?
Your exit plan should incorporate all the changes necessary to bring your company to good health. While this extends your exit timeline, it also ensures that you achieve your desired exit. Tactics that could improve your business health include recognizing you have a problem, finding and retaining talent, and creating an excellent change story.
Recognize You Have a Problem
A business valuation done by professionals identifies problem areas in your company. By acknowledging these issues, you permit yourself to solve them. Professional business advisors will provide customized solutions to the issues of your unique company.
Periodically and objectively review your business plans to determine if you’re getting the intended results. If not, make appropriate and timely changes.
Find and Retain Talent
Look beyond your leadership team for people with institutional knowledge. These employees know the ins and outs of your company and understand the impact of potential changes on your business. They are the ones unhappy with your company’s performance and willing to reveal uncomfortable truths. Their insight and willingness to work for its success enable you to build your next talent level. Look for such people and find ways to involve them. Usually, giving them the opportunity they are waiting for is enough to retain them.
Create a Great Change Story
While you must increase company profits, you also have to maintain positive workflows to ensure that you can meet any emergency expenses like machinery repairs or replacements so your business runs smoothly. Also, it is imperative that your people feel the positive impacts of the company’s turnaround and remain confident about it.
The health of your business affects your exit strategy. It determines whether your exit planning process will be quick or prolonged, smooth or tough. So, if you want a smooth exit, focus on the long-term health of your company with proven measures that protect your company’s health or restore it to good health.
The experts here at Quantive can help. Get in touch to learn more.