Today, we are wrapping up our series on why every business should prioritize exit planning and why you should start working on it. If you missed Part 1: Why Businesses Fail or Part 2: Risk and Exit, check them out here.
As investor and entrepreneurial icon, Carl Allen, would say,
"The only reason to have a business is to sell it and get paid for it."
I agree.
Today, I'm taking you to Exit Strategy Court where I’ll be presenting the case for exit planning and giving you my closing arguments. Here are the facts of the case.
Argument 1: The Benefits of Exit Planning
Exit planning may seem like a tedious process, and many people assume that the reward for all that work comes way off in the distant future. Why would a business owner want to put themself through that effort before it's necessary? Well, because a well-designed exit strategy opens the doors to a far greater number of possibilities, including:
Delivering benefits in just a few short months
Providing options where none previously existed
Improving a business to an extent the owner may no longer wish to exit
Most business owners don't even realize what options they have for their exit, but the possibilities increase exponentially if they build a genuinely valuable enterprise.
The most important outcome of good exit planning is that you, the business owner, can define the process on your terms. You can transition when you want and not be a victim of the process. That's code for a lower valuation than you want!
What makes a great and properly-executed exit strategy? A good metric for evaluating exit plans and their success is to ask if it has:
Identified and removed risks, which often may have been in the owner's blind spot
Increased enterprise value
Forced a business analysis
Aligned people to function on the same page
Provided contingency plans that can be utilized to tackle unforeseen issues
Helped an owner identify and tie together three of his biggest priorities: business goals, personal goals, and financial goals (the three Ps). These priorities surprisingly don't frequently align.
Given them options for a future transition that they may not even have known about
Argument #2: Exit Planning ‘De-Risks’ the Business
We all have blind spots, and many are easily solved once we know about them. These are things like having shareholder and operating agreements as well as a solid buy/sell agreement—if there are multiple shareholders. Many business owners realize they need these, but see them as things to be implemented later on down the line. Often this leads to the owner simply forgetting altogether. Business insurance policies that automatically renew without any review may need to be updated with business interruption, cyber security, and key man insurance as well. While these blind spots are mostly ‘behind the scenes’, we should also think about other risks in our business that may be even more easily solved. Things like customer/supplier concentration risk and documented processes.
An excellent exit plan involves finding and addressing these risks in a business, which in turn leads to higher valuations. Look for more on de-risking in chapter 11 of Maximize Business Value, Begin With the Exit in Mind, or go to our website to download our free eBook, The Blind Spot: Hidden Risks—What You Don't Know Can Hurt You.
Argument #3: Exit Planning Creates Massive Value
Great exit strategies focus on building long-term and substantial additional value in the business. If you don't start thinking about exit strategy until it's time to sell, it's simply going to be too late to take many of these steps to dramatically increase the value of your business. Building massive value takes time.
Sophisticated buyers won't value short-term improvements the way they will long-term growth. A solid track record, usually in the form of multiple years and a solid ‘trailing twelve months’ (TTM), demonstrates your sustainability and assures buyers that you are not some short-term blip on the radar. In most cases, it will take several quarters—perhaps even a few years—to build value that is reflected in your financial statements and valuation.
Argument #4: Exit Planning Gets Your Whole Team ‘Singing from the Same Songbook’
Most business owners don't want their employees to know that they are thinking about selling their business. One of the strongest arguments for exit strategy is that it’s good business strategy. When you treat an exit as a business strategy meant to build value, involving your team is as natural as involving them in their daily job functions. When you set out to improve long-term value, you won't be shy about who knows; A business growing in value is where most people want to work.
Argument #5: Exit Planning Addresses The Unthinkable
No business owner likes to think about those things that could suddenly and dramatically change his or her business. We summarize them as the 5 D's: death, disability, divorce, distress, and disagreement. Every business should have a plan for what happens in case of the death or disability of the business owner. Life happens. It may be hard to stomach, but you or a key member of your staff may become disabled without warning.
Distress comes in many forms. Like a large customer serving notice that they are leaving for a competitor, a key employee turning in their two weeks' notice, or a breach of your systems exposing your customers’ data. I could go on and on. And, although never a pleasant topic, the divorce of a business owner or shareholder will likely trigger unintended consequences unless you prepare for it now. Finally, a great plan should also address what happens if a severe and/or irreconcilable disagreement arises between shareholders, which is incredibly common and likely to happen.
These events impact a business far more significantly than most owners realize, especially when no strategy is in place. An exit plan provides contingencies for these situations, greatly reducing their negative consequences.
Argument #6: Exit Planning Identifies Priorities
In Exit Planning Institute CEO Chris Snider's book, Walking to Destiny, he talks about the three legs of the planning stool: business goals, personal goals, and financial goals. Although the business owner is the common denominator in each of these, they are often not aligned, which can cause tension.
Business owners should intentionally think through these different priorities—if for nothing else than for peace of mind. The best exit and business strategies tie these three priorities together to form a unified set of goals and desired outcomes. When these three work in concert, the business owner can increase velocity—and drive massive value.
Argument #7: Exit Planning Provides Options on Exit
The Exit Planning Institute’s State of Owner Readiness™ survey revealed that two-thirds of all business owners didn't know all of their options for transitioning their business—and more importantly, for harvesting their wealth.
Most owners think that an exit strategy is simply selling their business to an outside
company, hopefully for a massive amount of money. And while that may ultimately be the result, there are other options that business owners should consider. These options include intergenerational transfers, selling to business partners or management teams, employee stock ownership plans (ESOP), outright sale to a strategic or financial buyer, and converting the business to a "mailbox" business. In a mailbox business, the owner leaves the day-to-day operations of the business but retains ownership. A well-designed plan explores these options and helps an owner determine where they ultimately want to land. Check out our free ebook, Business Transition Options: Pros and Cons.
Debunking The Assumptions About Exits
Now, let's debunk some of the flawed thinking surrounding exit strategies. Again, this is not an exhaustive list. Rather, just some prominent points. Find a thorough list in my book.
My business will sell quickly.
I already know what buyers want.
I get calls from potential buyers all the time.
I don't need a professional financial planner to know what I need to retire.
There's too much to do to get this business where I want it to be. I'll start thinking about exiting in three to five years.
Now let's break these down.
Argument #8: Why "I'm Not Ready" is a Poor Excuse…
“I'm not ready,” or, “my business is just not ready now, but I'm confident it will sell quickly!”
The unapparent issue with this approach is that you are probably not adequately prepared if you start to plan when you've decided it's time to exit the business—your odds of landing in the 83 percent that never closes a transaction increase exponentially. At the very least, you'll likely be in the category of accepting an offer far less than you want, or getting stuck with a deal that is less than desirable. If you start to prepare less than two years before the planned exit event, there is very little you can do to change the outcome. It is what it is.
This approach is way more common than it should be. And, of course, the problem with this approach is that if you've never been through a transition event, you probably don't know what you don't know.
I recognize that some businesses have little time to prepare, usually due to unforeseen circumstances. Frankly, if you have less than two years, you should focus on non-strategic issues and de-risking. While these activities typically add little short-term value, they are at least steps in the right direction that may help you position the business for a transition.
There is little data on business transactions as far as selling quickly goes, but the average is about a year. Some take much longer, some much less. Even if you have everything buttoned up perfectly, buyer due diligence can drag on for months, prolonging the process and increasing the likelihood of the deal falling apart.
Argument #9: Why You Probably Don't Already "Know What Buyers Want"
Every buyer in every business transaction has a different motivation. Some are looking for earnings, others are looking for recurring revenue, and others are looking for market share or expanded markets. The truth is, no one knows what a prospective buyer might be looking for. Hopefully, with a well-designed exit process, you'll turn up prospective buyers you never even knew existed. Indeed, some exits are designed for a specific buyer, but most buyers have yet to be identified.
Therefore, how can you know what a buyer wants before knowing who the buyer might be? That does not mean that you won't have a good idea of your buyer's interests. On the contrary, you should have clear targets in mind, but be open to the possibilities you can't imagine now.
Argument #10: Why Buyers Calling “All The Time” Could Be Lulling You Into Complacency
"People call me all the time." Here's a dirty little secret. They are calling everyone! They're prospecting! Let's do the math.
If you're a lower middle-market company, and for the sake of argument, let's call that what EPI calls $5 to $100 million annual revenue, then you are being stalked by every private equity (PE) firm on the planet. These PE firms have so much "dry powder" or committed capital that they have to invest. And, every one of them will tell you that they have been following your impressive story and that they have a serious interest in your market. This remark is not an indictment of PE firms. On the contrary, they play an essential role in the exit planning process. They are all just chasing the same targets.
In my first book, Maximize Business Value, Begin with the Exit in Mind, I provide a detailed analysis of the number of calls these firms make. Let's run the math; the law of averages tells us that EVERY business in the US should get at least one call every fourteen days. So, just because they are calling doesn't mean they are genuine buyers!
And, by the way, your chances of being stalked by these buyers dramatically improve when you win awards or get on some published list. In my last business, we were on the Inc. 5000 list (fastest-growing companies in the United States) four times and the Fast Tech List (fastest-growing tech companies in our region) six times. I was also a finalist for the EY Entrepreneur of the Year award, in addition to numerous other corporate and industry awards. Each time we "made the list," the phone rang off the hook. These callers had been following us for years and just wanted us to know that they are very interested in our space. Enough said. I'll let you draw your conclusions.
Argument #11: Exit Planning Defines Your Personal Financial Plan
Thinking you know how much you need to retire without having a fully baked financial plan is like driving at night with your headlights off. You cannot see the road, but you also can't see your instrument panel. Do you know where you're going? How fast are you driving? How much gas do you have? Are you even moving in the right direction? Are you going to hit a tree?
Look. In its simplest form, the purpose of having a professional financial plan is to know how much money you will need to live your lifestyle for the rest of your life. Certified financial planners consider your entire financial picture, including what you spend to maintain your lifestyle. They run the math to tell you what you'll need to live that way for the rest of your life. Even though most of your net worth is most likely tied up in your business, you need a financial plan. Add that to your To-Do list. Then ask yourself, will your exit plan allow you to meet your lifestyle needs?
Argument # 12: Kicking The Process Down The Street is a Never-Ending Exercise
I talk to many owners who understand that there's too much to do to get their business where they want it to be to exit. They believe they will spend time working on the right stuff, and in three to five years, their business will be ready in that ideal state to sell. Of course, in reality, most business owners are lost in the day-to-day and won't spend time planning for a future exit. Their business commands too much of their time. So, erroneously, they think they will start thinking about exiting in three to five years. They say that the three to five is an elusive target for several years, ultimately a myth. Just like the exercise program I plan to start every Monday, commit to action now.
Closing Arguments
In this article, I've built a compelling argument for why exit strategy IS good business strategy. Here are the facts:
Most business owners don't know the benefits of solid exit planning.
Most companies don't sell. Even when they try to leave, most business owners are stuck with an illiquid asset and cannot monetize their net worth.
Most successful exits are the result of advanced planning.
Chris Snider, owner of the Exit Planning Institute and author of Walking to Destiny, has about the best definition of exit planning I've ever heard.
"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."
Through solid exit planning, you can -
Build, harvest, and preserve wealth
Identify, protect, build, harvest, and manage enterprise value (EV)
Simplify the exit process and clarify the roadmap to success
Integrate your personal, financial, and business priorities into one master plan
I rest my case.
If you want to take action now to secure the best possible outcome when it comes time to exit your business, why are you waiting? Schedule a call with me and let's talk about your specific needs.
Be sure to check out our podcast for more tips on maximizing your business now!
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.