Business Owners Need to Start Growing Into Their Exit
Today, many business owners are realizing that it’s time to get their company in shape in order to prepare for an exit. Therefore, it’s imperative for owners to start running their businesses with an exit strategy in mind, focusing on the profitability, sustainability, and transferability.
In today’s market environment, many business owners are taking a look at the state of their businesses and measuring that businesses viability and continued profitability against their future exit. What many business owners are realizing is that it is time to get the company in shape in order to prepare for an exit – even if that exit is a number of years into the future.
Setting a plan for an exit requires a perspective on what a business owner is trying to achieve and when it is possible to attain such an outcome. An important consideration for every business owner is that of ‘exit windows’, or, how to time their exit to meet their personal goals. Once they understand the timing of their exit, there is an opportunity for them to begin planning today and to start making critical decisions based upon achieving this future exit. Without this type of planning, a business owner will likely find themselves without direction for their exit, and possibly missing the next exit window.
So, what should business owners be doing today to understand how to grow into their exit? Well, they can begin with the end in mind and understand that their personal needs from their business can be measured against where the business currently is.
In order to manage anything in life and in business, you need to be able to measure it. A measurement of a business owner’s current value becomes very important. Therefore a plan to grow that value as a business owner approaches their exit becomes a critical part of the exit planning process.
There are three components that a business owner should be looking at when thinking about growing into their exit. They are:
Let’s take a look at these three critical components in order to help further analyze the opportunities for a successful exit.
The profitability of a business is best understood as ‘the cash flows that would be available to somebody, other than current owner, who was to own that business.’ Profitability is critical to an exit because any future owner of the business – be it a buyer from within the industry or the management team, or another party – will want to know what they can expect as a return from owning that business. Although today's profitability may be lower than the past, business owners need to look ahead to the future to understand where the profitability will be and make the best projections that can be made. Business Owners need to be able to assume future profits and direct their efforts towards achieving them. And, once they have understood their Value Gap – i.e. the amount of money that’s needed to get out of their business to meet their personal goals – they will be focused on a purpose in achieving that profitability.
The second element to a successful business exit is sustainability – i.e. will the future owner be able to continue to generate profits in the company without the previous owner being here? This is a challenge for the small business owner in today's marketplace. Many owners are experiencing the short-term effects of feeling that their profits are not sustainable because of the economic environment. However, sustainability of their profits extends beyond simply generating cash flow. They also need to take steps to assure that the next owner will be confident that the profits will continue. The simple task of managing their business with systems and controls that are run by someone other than them is a good first step and something that can be accomplished in this market downturn. By doing this, business owners increase the ‘sustainability’ of their profits. And, by understanding how to sustain the profits in their business, they can look to grow into their exit.
The last component of growing into an exit is the transferability of those profits. Many businesses that are owned and operated by the primary business owner are non-transferable because when that owner becomes detached from the business, the business ceases to operate as it currently does. By focusing on transferability of a business, business owners will help ensure that management and the employees are capable to run the business, that systems and processes are well developed, that the brand is independent of the owner, that the customer will survive the owner’s exit, and that the business model is supportable without the owner. All of these issues can, and should, be addressed in today’s market environment for the owner who wants to exit during the next window of opportunity.
In conclusion, if business owners know that their “exit window” is four (4) or five (5) years away, it is important for them to begin planning today. They will want to run their business with their exit in mind, focusing on its profitability, sustainability, and transferability. In this way, business owners can increase the likelihood of meeting their exit goals, which have been measured as a part of their total exit strategy planning.
© John M. Leonetti
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ABOUT THE AUTHOR
Specializing in Business Exit Strategies, John M. Leonetti, Esq., M.S. Finance, CM&AA founded Pinnacle Equity Solutions to provide advisors with the tools they need to incorporate Business Exit Planning into their advisory practices. To learn more about John's Exit Strategy Services and to receive a FREE copy of his special report, "How To Incorporate Exit Strategies Into Your Advisory Practice", visit http://www.pinnacleequitysolutions.com/