Preface: Looking at your business through the eyes of prospective buyers, while working to double business value will likely improve profitability, (while you still own your company), and help you locate area’s that can increase value from a better understanding of how value is created, sustained, and successful transferred, i.e. doubled.
Investing to Double Your Businesses Value – Part VII
Credit: Donald J. Sauder, CPA
Exit planning for life after business, is a pillar to successful business strategy. Only the best of the best entrepreneurs get it right. You’re advised to exercise a plan to think about exit planning early for your business from the perspective of prospective buyers, even if you have only been in business a few years. It’s a necessary step to double business value, not to say managing your business like a great entrepreneur.
Exit planning usually is accomplished with a sale to family or a third-party, i.e. key employee. It is more than signing on an articulate will, or grooming a family member successor. The sooner you start planning a business exit, the more options, and opportunities your business will hold to harvest optimal value, and transfer business wealth successfully in an ownership succession transfer. Planning your exit from a business requires more thinking through a buy/sell agreement with an advisor, or obtaining continuity insurance. Although some entrepreneurs think exit planning is only necessary if estate or trust planning are required to effectively distribute business wealth, effective exit planning in the scope of doubling business value, is strategizing your business from the perspective of potential buyers.
In a third-party sale, you can have an enterprise sale or partial sale. A partial sale typically will result in the entrepreneur continuing to own from 80% to 20% of the business equity. Exit planning is often advised three to five before retirement, or a succession transfer, but the best entrepreneurs will plan the exit early, before it is even necessary. At least half of entrepreneurs exit their business unplanned; i.e. they haven’t prepared there business for a second generation life.
In addition to value creation, you should think about exit planning strategy early because people count on your business, e.g. if you’re a manufacture for a business, and a major source of vendor supply, your business should feel a responsibility to not domino problems for the business chain because your materials or services are not easily available elsewhere. Transition and exit planning is not self-centered, it’s responsible business; because transition risks are relevant not only to you, but your customers and clients too. Good entrepreneurship should advisedly include strategies to reduce exit risks to valued customers or clients.
Don Feldman, Sage advisor at Keystone Business Transitions, LLC in Lancaster, PA, has the following advice for entrepreneurs with regards to exit planning:
When valuing a closely held business, I frequently pose the following question to the business owner: what do you think the business is worth without you? A similar question can be asked in regard to key employees: what is the business worth without your key employees? If they are critical to the success of the business their possible departure represents a risk to the business.
……The more difficult problem is when the owner is “key” to the business and can’t easily be replaced. We see this most frequently when the current owner was the founder of the business and retains the principal customer contacts or the “know-how” essential to the business.
This situation is a good example of why, when I ask the business owner “how much is the business is worth without you” the best answer is “it doesn’t matter if I am running the business or not”. This means that the business will have just as much value in the buyer’s hands as it does in the seller’s and it is relatively easy to sell the business. However, we are frequently presented with a situation that is not ideal. The art of the exit planner is to be able to develop solutions that will work in the “non-optimal” case.
The purpose of planning or strategizing what your business exit plan is before beginning the doubling of value to your business is advised for two reasons, 1) Intrinsic business value is only realized tangibly with a successful exit from ownership; and 2) You need to understand what will encompass that value at exit, e.g. tangible assets; or intangible assets.
Looking at your business through the eyes of prospective buyers, when working to double business value will likely improve profitability, while you still own your company, and help you locate area’s that can increase value from a better understanding of how that value is created, sustained, and successful transferred.
Part VII of Investing to Double Your Businesses Value – think through your business exit plan today, from the eyes of prospective buyers.