The majority of business owners will attempt to gain financial security when they exit their businesses. They need that money to finance their future goals, whether that be retirement or another business venture. It’s far better when owners understand how important it is to grow that value far in advance of when they need to exit. Unfortunately, too many owners do not use the exit planning process and its emphasis on targeting value drivers to strengthen their businesses – for their own benefit, the benefit of their employees, and the legacy of the company itself.
We have talked about the importance of setting an exit date before. One enormous benefit of setting an exit date is that it forces the owner to create and honor a timeline, a timeline that plots value drivers that will build the business and make it less owner dependent. Getting input from a team of professional advisors and working with an exit coach is very helpful in both sizing up the weaknesses of the company that should be addressed and determining what the owner’s real financial needs will be post-departure. If the owner does not have any idea of what his financial needs will be, it’s unlikely that they will be met by the sale of the business.
Here’s an example:
Business Owner A may determine that he would like to exit his company in five years with a post-exit annual income of $250,000. After consulting with his advisors, he learns that he needs to increase the value of his business from $3 million to $4.5 million in order to meet that goal and that growing cash flow (or EBITDA) by $100,000 a year could make that happen. This then become a concrete goal on the owner’s exit planning timeline, a benchmark for the owner and his advisors to keep their eye on. The next step in the process would be to assess the company’s value drivers and determine how robust they are.
What Are Value Drivers?
Value drivers are entities “that increase the value of a product or service by improving the perception of the item and essentially providing a competitive advantage. Value drivers can come in many forms such as cutting-edge technology, brand recognition, or satisfied customers.” These value drivers are what will draw interest in a business when the time comes for it to be put up for sale. They often create sustainable and ever increasing cash flow. Some examples of value drivers would be:
- Stable and capable management that will remain in place after a sale
- A large and diversified customer base
- Brand recognition
- Good cash flow
Installing strong value drivers is a crucial element of the exit planning process. When a company’s value drivers are strong and obvious, the company’s value and curb appeal to buyers will increase, making it both more valuable and easier to sell – a win-win scenario. While the company’s value can be built without utilizing a strategy targeting specific value drivers, it will likely take longer and have less obvious results. And when an owner has a timeline to follow to meet a specific exit date, there’s no time to waste.
Too many owners focus on the exit part of exit planning, but the planning part is much more valuable. Planning, when combined with targeted action addressing and improving a company’s value drivers, is what will increase value, cash flow, and overall operational performance in the short and long term, benefiting both the business and the owner’s bottom line.
If you’d like to learn more about installing value drivers in your company or talk about using exit planning to build business value, contact Prometis Partners today.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.