by Rachel Boynton, CM&AA
For anyone running a business, it is always important to develop a succession plan. Who will take over leadership if someone moves on? How will you keep the cogs turning when you have a change in control? Yet many small- to mid-sized business owners are so mired in the details of the day-to-day operations that they don’t consider such changes since they take on staff responsibilities until someone else rises to the occasion. But if you run an organization, you need to be asking yourself: Who will step in when you’re ready to step away?
The fact is that all owners will exit their companies, whether by sale, employee stock ownership plan (ESOP), management buyout, a gifting program, or simply closing the doors. It’s just a question of whether that exit will be a desperate act or a calculated transaction. The sooner that you start to plan for your exit, the more likely you will be to get the most from your investment.
The primary goal of an exit plan is to protect the business owner(s) against giving back what equity they have already built through the organization. This planning can happen many years before the exit and may change over time, such as when an ESOP idea doesn’t pan out as planned. Despite 95 percent of business owners affirming that “transition strategy is important,” 62 percent had given limited to no attention to their exit plans and 43 percent had performed “no planning at all,” reports the Exit Planning Institute.
Getting started with exit planning can feel a bit overwhelming. To help you begin the process, here are three of the first areas to focus on.
1. Personal Financial Readiness
Most owners have 80-90 percent of their financial wealth locked in their businesses. Without proper planning, many owners who exit quickly leave much of their equity on the table. Start to picture your company as an investment, not a job or paycheck. A worthwhile initial step of exit planning is to work with a financial advisor to determine your current personal financial position and how much money you would need to continue your desired lifestyle. It may not be possible to extract this much money from the organization at the point of transition/sale, but you may be able to work a few more years to get closer to this goal and, during that time, increase the value of your company.
Something to keep in mind: The price tag of your company to a buyer or investor is directly tied to the top and bottom line of your business. I have spoken with many sellers who anticipate a much higher price for their business because of the time they have put into the organization, their dedication to the business, and their quality of services, only to learn that the market was not in that same ballpark.
It’s important to prepare your financial picture by looking at the value of the business from the perspective of the buyer rather than what you believe it to be. Buyers begin by assessing the financials and establishing a purchase range based purely on that assessment. Multiples can then be increased based on the perceived risk. If you have a well-run and successful organization, you will achieve a higher multiple of your adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Knowing your market value can help you determine whether now is the best time for an exit or if you have some cleaning up and growing to do to maximize value out of your company. If you receive a multiple of 5x EBITDA for your company, that means for every dollar you cut of unnecessary expenses, $5 of additional value will go in your pocket.
2. Mental Readiness
Your business not only puts money in your pocket, but there is a web of other people who depend on the services, products, and jobs that it provides. The more you can prepare the organization to continue under different leadership/ownership, the more likely it is that success will continue following your departure.
When you begin to think about exit planning, this is also a good time start emotionally distancing yourself from the day-to-day running of the business. So many of us think of our organizations as extensions of our family. This typically makes decision-making difficult. After transitioning out of my company, I learned quickly that my employees knew how to fend for themselves and adjust to working with a new owner. It was important to my mental health and theirs that I created a more professional working relationship as I slowly approached my exit. This led to a more successful transition.
3. Business Readiness
When surveyed, many business owners would prefer an internal transaction of their business (i.e., ESOP or transition to a family member). However, when the time comes, many employees or family members are not ready to assume the risk and/or responsibilities of ownership.
I spoke with one owner who had provided stock to five key employees — some family members — early in the company’s life with the hope that they would eventually take over the organization. When the time came for these employees to buy the owner out and they were asked to personally guarantee the loan for the acquisition, none of employees were willing to assume the risk even though the business was strong and profitable. It’s important to know your options for exiting the business and gauge the plausibility and likelihood of success for each option by engaging in serious conversations with those people who would be involved in the exit.
It will also be important to begin to remove personal expenses from the company, diversify your payor sources, and strengthen your organization’s financial health. If you decide to sell, you will receive more value if you have a strong business that poses little risk thanks to the safeguards you put in place.
When I worked with the owners of one company to prepare for their exit, I learned that they were so involved with the day-to-day decisions that the management team was dysfunctional. By creating goals, budgets, and reporting tools, we distanced the owners from decision-making and developed a functional management team. When the owners eventually sell their company, the leaders on this team will know how to keep the organization moving without the daily involvement of the past owners, which increases the odds for success of the new owner working with the team.
Understanding the Value of Exit Planning
I often have calls with owners who are curious about the value of their business but are not yet thinking about their exit. I try to impress upon them the importance of starting their exit planning sooner rather than later because of its direct impact on the value of the company. There are many ways to strengthen your organization to increase the likelihood for a successful transition of ownership that also ensures you receive full value for your hard-earned work. Beginning the exit planning process will help bring more of these opportunities to light and allow for ample time to maximize them.
Thinking about selling your company? Unsure when you should start thinking about selling? Have general questions about selling? We’re here to help. Email Rachel at firstname.lastname@example.org or call 603.568.9940.