By: Patrick Ungashick
Whether you plan for it or not, you will eventually exit your business. But like most owners, you must concern yourself with running your business today. As busy as you are, I encourage you to take a few minutes to see how a well-planned exit can have a very positive impact on your current business.
When building a business with the end in mind, it’s not enough to just grow revenues or make more money each year. How you get there becomes as important as the results, because exit planning holds your business up to a brighter light. It forces you to consider not only what you and the business need today, but also what is needed in the future. Taking action to meet those needs creates a potentially better business today.
Assume that we are speaking with an owner who wants to sell his business for the maximum value to a third party. He is pleased to announce that revenues are up 25 percent over prior year. The buyer is likely to say “Great, how did you do this?”
The owner’s answer will impact how much the buyer is willing to pay for the business. Assume the answer is something along these lines: “Well, most of the clients know me and have worked with me for a long time. Over the last few years I have really focused on sales, so revenues are up.”
Hearing this answer, that buyer is probably reducing in his head the price he is willing to pay. Contrast the first hypothetical answer with this “fine-tuned” second: “Well, our business development team—headed up by our bright, young VP of Sales—has really established a competitive edge in core markets. Several years of effort are just starting to take off.”
This second answer is probably increasing the business’s price with every passing minute. In both answers, sales were up 25 percent. Yet the revenue increases were accomplished quite differently. In the first answer, results were tied to the owner’s efforts. If that owner exited the business, or just got tired of going on sales calls, it appears much of that revenue could be lost. The second answer unquestionably reveals a better business. That business will grow without its owner going on sales calls and has established competitive advantages that a buyer can build upon.
Consider another example. Assume for a moment we are speaking with an owner who desires to sell the business to one or more top employees. Most business owners recognize the need to motivate and retain top talent. However, if an owner intends to sell his business to employees, motivating and retaining them becomes far more important.
Let’s give two hypothetical explanations for how this owner might approach this issue. The first is: “My top people are truly loyal to me. They trust that I will take care of them and treat them fairly. As for motivating them, I pay cash bonuses based on how well I feel everybody did.”
Contrast the first hypothetical answer with this approach: “While I have great relationships with my top employees, I feel that it is not enough in today’s competitive marketplace. Several years ago we developed a phantom stock program that ties their rewards to key business results. If the employees quit, they forfeit the phantom stock. If they stay and buy my business, the phantom stock is convertible to cash to help fund a future purchase of the business from me.”
Both approaches could work. But in the first approach, motivation and retention is based on personal loyalty. How cohesive and effective will that management team be once the current owner is gone? The second approach clearly creates a better business today, has less risk of key employees leaving early, and compensation is tied to measurable performance. Under the second approach, the owner also has begun to address the difficult issue of how the employees are going to afford his buyout.
We identify seven steps that you need to take today in an earlier blog “Steps That Will Nearly Always Maximize Value at Business Sale”.
So what does an exit plan look like, and why would it add value? By now, you may be convinced that you need an exit plan and should get started on it right away. So, what exactly is an exit plan? According to our research, nine out of ten owners stated they do not have a current, written exit plan. Most owners need guidance on what a sound plan looks like.
A thorough and sound exit plan needs to address six (6) areas. If a plan fails to consider any one of these areas, it could not only miss an issue but possibly cause more harm than good.
- The plan should be as tax efficient as possible in converting your business ownership into personal wealth.
- The plan should use sound legal tactics and instruments to protect you and your business.
- An exit plan accurately models how you achieve your post-exit financial goals, most importantly financial freedom.
- The exit plan should support the business’s current and future operational needs in areas such as management, financial stability, and reinvestment.
- The plan should help to maintain family harmony and achieve family goals.
- An exit plan should address whatever else may be important to your peace of mind in post-exit life.
Your plan should be reviewed by your trusted advisors, most importantly your accountant(s), attorney(ies), and financial advisor(s). Exit planning is a multi-disciplinary effort. In this NAVIX Case Study, we demonstrate how an experienced exit planning team can add value by saving the business owner a million dollars twice with proper exit planning implementations.