Business Exit Strategy – Maximizing Value
By Tom Flynn, CEPA, CPA
Every business owner will, at a point in time, exit their business in some way. Most, however, don’t think about how they will exit until they are almost ready. I have found that most business owners are so engrossed in running their business that they don’t think about selling until six months before they want to exit. Unfortunately, this is a poor strategy. Effective exit planning takes time.
A survey was conducted by the Exit Planning Institute, in partnership with Grant Thorton, PNC, and theOhio Employee Ownership Center at Kent State University. This “State of Owner Readiness“ survey found that 75% of owners who sold their businesses had “seller’s remorse” because they felt as though 1) they did not receive a fair monetary value and 2) were not prepared for the emotional impact ofselling their business. Seller’s remorse can be rectified by beginning to plan for the exit transition three to five years before an owner wants to exit.
The typical exit plan will determine an “Attractiveness Score” and a “Readiness Score”. These scoresreveal the areas of improvement needed for a successful transition. The attractiveness score indicates what is needed to make the business attractive to a buyer. The readiness score addresses the questions:
- Is the business at its ultimate value?
- Is the owner ready to sell?
- Does the owner have an adequate financial plan?
The goal is to utilize information from the attractiveness and readiness scores to determine what actions need to be taken to build the company to its maximum value over three to five years, no matter whtype of exit the owner will choose. An added benefit of this process is normally an increase in profits and cash flow during the growth period because of the actions taken.
This focus of this article in on building the business value. How, specifically, to do this varies from business to business based on many factors, but the end goal is the same – to create an entity that will provide maximum value to the new owner or owners, and therefore create the maximum exit return for the current owner.
First, of course, creating maximum value involves increasing revenue and the bottom line. Achieving these goals may involve increasing sales and marketing efforts utilizing techniques that provide the maximum ROI. Other initiatives may involve expanding into new markets or diversifying the company’sproduct or service offerings. Any of these actions or other growth initiatives will require capital, so before beginning any growth efforts, it must be determined where this capital will come from. These are a few options:
- Current assets – Is there cash on hand or are there other liquid assets available? How much is available? What are the risks vs. returns of using these assets?
- Cash flow – Is cash flow being maximized by the effective management of accounts receivable, payables, and inventory? More cash on hand can be used to fund growth.
- Capital raising – Is there a potential to raise debt or equity financing? This is a complicated issue– exit implications of capital raising must be carefully considered. It can have a serious impact on the market attractiveness of the business if not managed correctly.
Second, growth much be managed. Increasing revenue will require an increased ability to fulfill orders, additional customer service, and other potential expenses.
Third, the company needs to have a sustainable competitive advantage, and that advantage should be strengthened as much as possible.
Fourth, making the business attractive to the market will require a stable and experienced staff who will be likely to stay after a change in management.
Finally, the business’s reliance on the owner must be considered. If the expertise or customer relationships of the owner are keys to the business, there must be a plan in place to transition these to another key manager or to the new owner.
The value growth initiatives we have discussed are not all inclusive and must be part of a comprehensive plan, the formation of which requires the skills of an experienced professional. This plan, again, must be created and initiated at least three to five years before the expected time of exit.