(Blog Series 6 of 10)

It is common to receive urgent messages from clients seeking assistance with business valuation or inquiring about mergers and acquisitions (M&A) advise because they are selling their businesses. The problem is that, more often than not, the process of “selling the business” hasn’t been planned properly. Whether it’s due to a sudden buyer, burnout, divorce, or unfortunate events like disability or death, many business owners find themselves unprepared.

That’s why I believe it’s crucial to discuss the importance of having an exit planning strategy in place. It doesn’t matter if you plan to sell the business this year (which might be too soon without a plan unless you have an irresistible offer) or in 20 years. The official definition provided by the Exit Planning Institute states, “Exit planning combines the plan, concept, effort, and process into a clear, simple strategy to build a business that is transferable through strong human, structural, customer, and social capital. The future of the business owner, their family, and the business itself are addressed by exit planning through creating value today.”

An essential aspect of this definition is that exit planning is a strategy that creates a plan to be executed to grow the value of your business so that the owner can transition the business on their terms when they are ready. In other words, once you have your exit plan, you will be working on your plan for when you are ready to sell, but every year you will be working on a strategy to continue growing your business and achieving your short and medium-term SMART goals too.

It has been demonstrated that, when the time comes, business owners often leave money on the table because every year they focus on revenue generation and not on enterprise value. One of my clients was ecstatic because the business had $2 million in revenues and increased in two years to $3 million. The owner celebrated, thinking that the only thing that mattered for the business was the effort put into selling services. However, when the business was selling $2 million, with a net profit of $20k, the value for that business was almost nonexistent. After a couple of years, the revenue increased by $1 million, and the net profit was $1 million too. In that particular case, the changes implemented for value growth as part of an exit plan were crucial for improving the enterprise value. If revenues were the only important part of the business, then companies would have the whole selling team as a C-level. Make sure you focus on what really matters!

Some of the steps toward successful exit planning, focusing on the business side of the exit plan, include:

Valuing your business: How do you plan the strategy to arrive at a certain level of value for your business if you don’t know what the value of the business is today? Do you know how many deals fail because the owner tries to imbue its emotional value into the business instead of knowing its actual worth?

Knowing your value gap: The difference between the actual value of the business and where you want it to be for your retirement is one of the “gaps” evaluated during an exit planning process. Identifying this difference is crucial not only to implement the correct strategy to increase the value of the business but also to manage expectations.

Creating and Maintaining a Disciplined Risk Management Process: De-risking strategies are essential for businesses of all sizes. Risk mitigation strategies help businesses identify and reduce risks. This can involve implementing internal controls, purchasing insurance, and complying with regulations. Additionally, evaluating client concentration and identifying key employees necessary for strategy implementation is crucial.

Knowing your options: Your business is unique. While it may be in an industry with multiple competitors, each business is different. Similarly, you need to understand your exit options to plan accordingly. Are you thinking of selling your business to the next generation, or would your best bet be selling to a third party? Evaluating and deciding on these options ensures your strategies are aligned.

Exit planning is not just about selling your business. Adopting a yearly exit planning strategy with the end in mind is not just prudent; it’s a strategic imperative. By making exit planning an integral part of the annual business agenda, business owners can proactively shape their future, maximize value, and leave a lasting legacy. It’s not just about the exit; it’s about ensuring that the exit is a culmination of years of thoughtful planning and strategic decision-making.