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Have you heard the myths about exit planning? Business owners looking to monetize their value in the enterprise long term may have come across these misconceptions that can hinder a smooth and fluid transition. Myth #1: Exit planning is only necessary for retirement age business owners. Myth #2: Selling the business to a family member is the easiest option. Myth #3: Exit planning is a one-time event. But the truth is, successful exit planning requires a strategic and ongoing process that involves various essential components. I’ll reveal these components and how they can lead to a successful exit in the long run.
In this episode, you will be able to:
- Discover the significance of exit planning for business owners to ensure a smooth transition.
- Uncover the essential components that contribute to successful exit strategies.
- Learn how financial analysis and industry trends play a crucial role in effective exit planning.
- Gain insights on empowering leadership through strategic planning for long-term success.
And more!
I’m grateful you’re here, and I look forward to guiding you toward securing your legacy and transitioning smoothly through this podcast. If you enjoy the show, please subscribe and share it with someone you think might also find it beneficial. Thanks so much for listening!
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Transcript:
00:02:18
Most of you that are hearing this podcast probably may have heard these statistics over time. So two out of ten businesses that go up for sale, so to speak, will actually sell, and that 30% of family businesses that are willing to transition to the next generation are usually successful 30% of the time. So certainly the numbers aren’t huge. I think they’re really good. I think the key point here is telling us is that if you’re looking at one of these, other than just shutting down the business and even that would warrant to do some planning, is that if you’re really trying to monetize the value or make sure your family is prepared to take over the business.
00:03:01
Doing some planning ahead of time would probably be a prudent thing to try to approach and accomplish. Let’s talk about for a few minutes here. Let’s talk about what does exit planning really entail and it’s really looking at the business from the outside in. What would a prospective buyer look at your business and how would they gauge your strategic capacity, as we call it, your ability to be able to produce sustainable cash flows and grow enterprise value in the business over a period of time? And how well could you actually basically prove that you can do that over a consistent period of time?
00:03:44
So when you’re looking to go through an exit planning process, one of the main things that’s going to be done is pretty obvious is a financial analysis of your cash flows, your debt, what does your operations look like, what is the consistency of your revenue over a three to five year period of time? We here at Prometis Partners usually look at a three years in reverse. So three years of history and then we’ll do a three year projection. Then you also want to take a look at industry benchmarks and trends and why is this important? So I think when you take a look at overall at the industry is we want to make sure that we’re going to be able to have a general idea of is the industry really growing and what do we anticipate that it’s actually going to be growing at?
00:04:39
And what are some of the challenges that we see moving forward so that no matter what type of a transition that we’re doing, we can actually look at? How do we ward off? Or how can we eliminate some of those risks that might actually be out there when you’re benchmarking your company to the industry? I think a great thing about that is it kind of sets the tone to say where are we financially? From revenues to gross profits to net profits, what’s our SGNA, whatever financial benchmarks really drive you?
00:05:20
Usually they’re going to be somewhere between five to seven. You want to just kind of say where are we in those respects to our industry and what areas can we improve on and then how do we maintain and keep that moving forward? So you have a benchmark of looking at it every single year and certainly you could go higher in any of those but I think that certainly is a start in what you want to do. One of probably the most overlooked areas in exit planning is the leadership. And what we have to try to understand is that leadership should be the group of people that are actually driving the strategic initiatives within the company and allowing the business owner to really look at it from a CEO or a visionary perspective.
00:06:13
It’s like what should we be doing next to move forward? What are the types of things we should be working on and discussing that with the leadership? But the leadership should be executing, relating, building better culture within the company and kind of moving that through its process. So those are a couple of things that we always want to make sure that we keep in front of us as we move forward. And they are important from you as a business owner because what you want to think about is where is my company and how do I compare to what we define as best in class businesses.
00:06:47
Because all business owners and businesses should want to monetize as much of their value as they possibly can. Now some circumstances may not allow you to monetize that for health issues or some other issues that might be going on and certainly that’s understandable but I think to know what that is and how do you work around that and certainly the sooner that you try to work on that, certainly it’s better. And so one of the other things that goes into an exit plan analysis, or what we call a strategic capacity analysis, is really how do the different areas of your company align with each other and how well do they play in the sandbox or how well do they talk and speak to each other as you kind of go up and down and work through those. So that would be kind of the level of the planning that you and the company have done. The quality and execution of your leadership certainly like your marketing, your sales, your people and your culture.
00:07:50
How effective is your operations? Is that in line with all of the other areas? And then certainly finance, how well is your finance and what gatekeepers do we have there? Are there any bottlenecks in any of those areas? And then your legal side, one of the areas that sometimes get very overlooked but legal is very important as you kind of go through the exit planning process, as you kind of move through that and get prepared.
00:08:15
So another quick statistic that I ran across. I like to just kind of run through these periodically as we’re having the podcast and just kind of working through that. Just give people some information. 80% of business owners have never sought out advice about their exit or their exit options. That is a large number to me.
00:08:32
It’s just like a big number, right? It’s like are we just hiding underneath the covers? Are we just trying to wait to see if something lands on our doorstep? I think it’s best to try to hit it on head first. Understanding that as a business owner you’re working very hard and you’re trying to work through the process and you have your day to day things that need to be done on a regular basis but certainly taking the time out.
00:08:57
In most cases when you go through an exit planning process, certainly over a twelve month period of time, you should be reducing what we call the dependency upon you as an owner being there every single day doesn’t mean you’re not in touch with things. It just means the business does not need you to the degree as maybe what you thought or maybe what really should be happening. And that also helps you to create a business that is much more transferable and attractive to somebody else, whether it be an outsider or whether it would be your children, because you want to make sure that, hey, can this business function without me? And if that’s the case, it’s easier to move someone else into that seat. So I think that’s always an important thing to take a look at.
00:09:41
So let’s kind of shift our thoughts here and talk about why should you really even consider an exit plan? What is the overall end result when we kind of get to that piece and then we can kind of move forward from there? So I think one of the main things that it does is it creates a better focus for the business in the leadership. What better way to move your company forward than to make sure that you the owner or owners, if there’s multiple owners and your leadership team are all on the same page and aligned as to the direction of the company. So let me kind of clarify one thing.
00:10:22
This doesn’t necessarily mean that you’re trying to increase the value of your company by ten to 20 million. It could be, but it could just be that you want to try to create a business that is much easier to run for you, doesn’t require as much time on a day to day basis, allows you to spend more time with your family and then certainly move the company forward. So there’s many ways that you can do that and how you want to view that. But I think there’s no downside to creating a better focus for the business and the leadership. I think it also helps to create better decision making.
00:10:56
So when people know what direction that they’re headed, when people understand what the expectations are of what they’re supposed to be doing and understand how we’re going to get there, what better way to help them make better decisions? I mean, I hear from business owners all the time, it’s like, well, I’ve got really good people, but they kind of lack on making decisions and moving things forward. Sometimes as I have a conversation with them and move through that process, I really find it’s like, well, are you really empowering them to make those decisions? And do they have a clear vision for that? So that would also help as far as what you’re doing with an exit plan.
00:11:34
It also helps to remain committed to building the value for the business. So now everybody is on the same page. They understand that we want to create more value, right? Certainly the employees want to have more value because to them it creates stability. It creates, hey, my work is going to be here, then tomorrow the business is in a good place and things are happening and going in the right direction.
00:11:58
Everybody understands economic cycles, but I think that’s there too. And then certainly for you as a business owner, it would also help with the clarity on the value gap that you own. And what do I mean by that? So the value gap is really how much do you have in investable retirement assets to generate passive or income once you retire from the company, and then how much of the value of the company do you really need to be able to sustain or increase that value once you’re no longer with the company? So that’s really the value gap that we look at.
00:12:32
And I think that that’s really important as you move through a process is how much have I saved and planned ahead of time, personally to make sure that okay? If the company didn’t exist yesterday, could I maintain at least the same lifestyle that I have currently, or what else do I need to do, or do I need more value out of the company than what it’s worth right now? So those are some of the things that we got to take a look at. So that’s kind of a rundown of a few points to take a look and talk about why you would want to do an exit plan and some of the benefits. Another quick stat that I was able to pull out is 60% of owners agree that having an exit strategy was important to their future and to the future of their business.
00:13:18
That was a stat that was issued by the Exit Planning Institute out of Cleveland. And I think they create a significant amount of data and certainly a platform for not only advisors to be educated, but for owners to be educated also. And how do you move through that process? So I think it’s important for you as an owner, if you’re an advisor, an attorney, a wealth manager, a CPA, an investment banker, M, and a person. If you’re working with business owners, you want to make sure, are they ready and what are some of the next steps that they really need to take into consideration to move through that process.
00:13:52
So let’s just kind of summarize a little bit about what we talked about today. We talked about what is exit planning, some of the things that it helps the company to do, why you would really want to do it, how does it help reduce risk in the company, decentralize the owner from the company to create a more fluid and smooth flowing business as you kind of flow through? So hopefully that this little conversation that we’ve had today has helped get a better understanding of what exit planning is. If you as an owner or an advisor would like to take a look at what your value gap is or what it might take for you to get to the levels of value that you’re looking for in your company. If you’d be willing to spend 14 minutes with us on a phone call or a virtual meeting, we’d be happy to do that.
00:14:37
You can either go to our website and chat with me there, or you can go to LinkedIn and send me a message. I’d be happy to schedule a time with you and shoot you over my calendar and schedule time that’s convenient for you. Otherwise really appreciate you being on the podcast today. Hope that you got something out of it. Finishing touches will be both on YouTube, Spotify and itunes, so you can and research it there and pull it up either through your favorite app or watch it on YouTube, because we do have a video portion of it.
00:15:06
Also, thank you again for being here with us today and hope you have a great week. Thanks.