Why Exit Planning Is Really Value Creation

gap analysis

Exit planning goes with planning the company’s other processes, preferably before an investor comes on board. Potential investors should see the exit strategy’s results in the three main aspects of a business: people, processes, and business potential. I recommend entrepreneurs approach an exit process like a value enhancement process, i.e., plan backward, starting from the ideal result.

Exit planning aims to increase the value of a business in preparation for its sale. The process entails a value creation plan which involves setting annual objectives and quarterly initiatives into the strategic plan that measure earnings, kickstart growth, and reduce risk.

The accomplishment of these goals results in increasing the value or creating value for the business.

Earnings, Growth & Risk

What is the impact of earnings, growth, and risk? How do they influence value? How do buyers perceive them?

The value creation analysis, which is a part of the profitability analysis, shows the development of the company’s productivity and can track which stakeholders in the company benefit from specific productivity gains. Increasing efficiency is an essential factor that leads to an increase in profit and, thus, in share prices. For some companies, a quick sale or a sale on specific terms is more important than maximizing prices. That’s perfectly fine. Other entrepreneurs, however, very much desire the maximum price and want to optimize the company’s full potential before the sale.

“Insanity is repeating the same mistakes and expecting different results.” (Narcotics Anonymous, not Albert Einstein)

To optimize the company before selling it, the business owner needs to identify its potential and understand the business model. These analyses can then be discussed with the upper management, the advisory board, and shareholders. This discussion can lead to additional insight. This is necessary because, without change, everything will stay the same.

Therefore, the first step on this journey involves a thorough review of finance and processes. Usually, within a few days and through consultants’ experience and professional questioning techniques, basic potentials are identified, then expanded during implementation.

Once you start exit planning, invest in your business and improve it until it sells.

You decide whether the sale of your company will be successful when you prepare for that sale. This includes optimization and potential enhancement, apart from the necessary preparatory work. What many entrepreneurs and M&A service providers do not understand is that there are characteristics for every company and every specific situation that have to be worked out and which later make the difference.

Start investing in your company to improve and optimize the processes that will add value to the business. Investors don’t just buy based on historical metrics but also because they’re interested in its future. When preparing the business for a sale and marketing it to potential buyers, emphasize its features to “sell” the asset.

Focus on increasing your business’ profits and cash flow.

To ensure your business’s sustainability and a reasonable valuation, you must protect yourself against any risk to cash flow. The best way to enhance the company’s value is to show solid results and excellent profits over the past few years.

Optimizing a company’s cash flow is a challenge. Poorly managed, it may quickly lead a company to its downfall. It is a crucial success factor managed well because it forecasts continued good cash flow for the buyer. The process focuses on equipping yourself with a system that will provide you with both reliable data and a deadline sufficient to give you the possibility of reacting to adverse circumstances.

Cash is the lifeblood of a small- or medium-sized enterprise (SME). You buy materials or goods during the operating cycle, conduct marketing or operations, and then issue an invoice for your products or services. You may have to wait to collect the receivables. The period during which the money is not available for a new cycle requires a permanent liquidity cushion. Cash flow, therefore, must be monitored daily. Once you start planning for a business exit, you begin to focus on increasing profits for the business and maintaining a healthy cash flow, which directly affects your business’s value.

Exit planning results in keeping detailed and reliable financial records.

Make a good impression on prospective buyers with well-designed data and orderly documentation. When all relevant documents that should be made available for each process phase are presented in good order, investors see this as positive and enhances your professionalism. All of this is prepared before contacting investors. To reassure buyers that your business is strong, consultants advise having three to five years of audited financial statements or financial reports as part of a review engagement.

Ensure your business stands out.

Exit planning ultimately compels you to complete tasks like keeping your online presence current and collecting testimonials from satisfied customers. Your focus on achieving your business goals intensifies, and you communicate better with your target customers. Once you start planning your exit, the most crucial element of your business is achieving your business goals.

There is no magic bullet for success, but if you measure what you are doing and take the time to understand the results, you can optimize performance on an ongoing basis. To do this, equip yourself with the necessary tools for proper monitoring. Motivate your employees to move together to fulfill the common goal of satisfying your customers and making the organization successful.

Company Health, Company Wealth

The assessment of the “right” company value, to a large extent, depends on the company’s current health, what future value it represents, and what value it creates for the potential buyer. For this reason, corporate health begins with a generally solid structure. Too strong a focus on maximizing company value can lead to missed opportunities and being sold too early for too low a price. Avoid the mistake of trying to grow the company to an inflated valuation and miss out on a consolidating market. It is much better to let a competitive market determine the company’s value.



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