Exit Planning Insights

What is Exit Planning?

Many business owners think that exit planning is simply how you sell your business. That is just not the case. Our method of exit planning is smart business strategy that accelerates your business growth and value today and offers readiness, opportunity, and transferrable value tomorrow. Rather than being a distraction from the important initiatives you currently have on your plate, this strategy aligns with and supports them. And it’s more important than you think it is.

Why is it important?

Many reasons may be cited why now is the time to incorporate exit planning into your prioritized business initiatives. Your success today and in the future hinge on these plans. Let’s take a look.

1)    In some way, the global pandemic impacted your business. In talking to clients and business owners nationwide, I have found that in broad strokes, two camps exist: The first camp consists of the non-essential businesses that are navigating the upheaval in business. If this is your business, you are likely trying to stay afloat and transitioning your business to survive the turbulent waters. You need next-generation innovation. If you plan to exit your business in the next ten years, you must align what you and the business need with that innovation to carry out a successful exit.  They can’t be two separate initiatives.

The second camp consists of essential businesses. Many essential businesses have experienced surges in volume, which are challenging to navigate with fulfillment and safety measures, among other things. That being said, these organizations are in a unique position to be acquisitional. Note that most acquisitions are not successful for various reasons, including capturing efficiencies, customer retention, cultural fit, and/or infrastructural weaknesses on either side. In this case, you need to ensure that your organization is prepared to onboard another and that you can transfer that acquisition into business value as part of your growth strategy. If you don’t, you could risk the value of your core business. This explanation is, of course, a simplification but helps to frame the importance conceptually. 

2)    The majority of business owners focus on the bottom line. While this is an important factor, it accounts for only half of the equation in determining a business’s value.  Businesses transact on an industry range of multiple determined by the capital markets. While business owners don’t control the markets, they can control where the company falls on that range by focusing on enterprise value. The other half of the value equation is the intangible assets of the business. What we, at the Exit Planning Institute (EPI), call the 4-C’s: Customer Capital, Social Capital, Human Capital, and Infrastructural Capital. These value drivers make a business ready and attractive for acquisition. Additionally, the management of these assets determines your ability to integrate another organization successfully in an acquisition.

3)    Most business owners prioritize the needs of their business over their personal and financial needs. Most business owners have 80 to 90% of their personal wealth tied up in their business. As a result, most business owners need their businesses to remain profitable.  Yet, 86% of business owners have not done a strategic review of their business or a value growth initiative.

4)    Fifty percent of business exits are not voluntary. They occur due to one of the 5-D’s: death, disability, disaster, disagreement, or divorce. The majority of business owners--94%--agree that having a transition plan is important. However, most don’t have one. Most business owners do not have a contingency plan if something happens to them, let alone a transition plan. For various reasons, this type of planning is not a top priority. Often, business owners stay busy and focused on running the day-to-day operations. They find it challenging to come up for air long enough to step back and think about exiting. Commonly, business owners love what they do and are excited about the initiatives they are working on right now. They can’t imagine transitioning out of their business.   For many, the idea of exiting their business is scary. Fear comes into play on many levels. Perhaps they don’t understand their options or feel like they don’t have any.  In fact, more than 75% of business owners don’t know their exit options. Exiting a business can also be scary to consider. As a founder, business is personal. It is part of one’s identity and what they have dedicated their time and energy to. The truth is, 12 months after selling, three out of four business owners surveyed “profoundly regretted” the decision because they didn’t have a personal plan in place to spend their time purposefully or ensure their financial security.

5)    Many business owners--over 60%--wish to transfer their business to a family member, key employee, or business partner. This type of transfer is what we call an internal transfer. However, less than 25% of business transitions are internal. Why? Family members and key employees are often undercapitalized and pay a lower price than a sale to a third party. Also, an internal transfer can be a challenging dynamic to navigate, whether it is with a key team member or with a business partner. The transfer is particularly complicated with a business partner when no clear, updated buy-sell agreement exists, or the transaction is not funded.

6)    Eighty percent of businesses that do make it to market don’t sell. Why? Because the business is not ready or not attractive. Some common reasons include unpredictable forecasts, owner reliance, customer concentration, reliability of financial information, and addbacks, among others.

7)    Timing is everything. It takes three to five years to position a business for an exit. If you are coupling that with navigating a business downturn during our current economic climate, getting prepared could take longer. We can’t control the capital markets. However, if you position your business to be ready at any time for an exit, you can capitalize on market trends.

What is our methodology?

Our methodology aligns personal, financial, and business goals into one clear, actionable plan to accelerate your business value today and ensure that you and your business are always ready to exit. Exit planning helps you build, harvest, and preserve wealth by focusing on enterprise value rather than just the bottom line.

Based on the Exit Planning Institute’s Value Acceleration Methodology, our process starts with two clear initiatives. The first is assessing your readiness as an owner and your personal and financial needs and wants. The second is assessing the current value of your business, the industry multiple, and where it falls on the industry multiple. With this information, we create a coordinated and cohesive action plan for you and your business. That action plan always begins with de-risking the business and your personal financial interests and assessing key strategic initiatives that drive value growth. Collaboratively, we activate a plan.

The Exit Planning Institute(c) Definition

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 you, your family, and your business are addressed by exit planning through creating value today.

What will exit planning help you do?

Preparing your business, personal life, and financial needs for a transition regardless of when you plan to activate enables you to:

• operate your business at a level of excellence today

• increase value today

• make choices about your future on your terms

• ensure that you have the financial means to maintain your quality of life long into the future

• transfer your incredible talent and passion into exciting ventures in the years to come

Maybe you don’t want to exit today. But, if you plan to exit your business in the next ten years, the time to begin thinking about your exit is now.

An exit isn’t an end; it’s a beginning.