In the dynamic landscape of business, owners must recognize the importance of preparing for their eventual exit by shaping their companies to be profitable, sustainable, and transferable. This forward-thinking approach not only enhances the current value of the business but also ensures a smoother transition when the time comes to step away.
In the realm of business, an owner's departure is not a matter of if, but when. As such, savvy entrepreneurs are increasingly aligning their operational strategies with their exit objectives. This alignment is crucial for maximizing the company's value and ensuring a seamless transition to new ownership. According to a 2021 survey by the Exit Planning Institute, 79% of business owners plan to exit their businesses within the next ten years, yet 49% do not have a written exit plan. This disconnect highlights the need for proactive exit strategy development.
To effectively grow into their exit, business owners should concentrate on three core aspects: profitability, sustainability, and transferability. These elements are the bedrock of a business's appeal to potential buyers and the owner's ability to achieve their financial and personal goals upon exiting.
Profitability is the lifeblood of any business and a key indicator of its health. It represents the potential cash flow available to a new owner and is a primary factor in determining the company's worth. Owners must not only maintain but also project future profitability to attract serious buyers. According to a report by BizBuySell, the median sale price for small businesses in Q3 2022 was $350,000, a 7.7% increase from the previous year, indicating the significance of profitability in business valuations.
Sustainability goes beyond current profit generation; it's about the enduring capability of the business to maintain those profits post-transition. This requires implementing robust systems and controls that function independently of the current owner. A study by Deloitte found that businesses with strong governance practices had a 17% higher market valuation than those without, underscoring the value of sustainable operations.
Transferability is the measure of how easily a business can continue to thrive under new ownership. It involves cultivating a competent management team, establishing solid operational processes, and ensuring the business's brand and customer base are not solely reliant on the current owner. A survey by the National Center for Middle Market indicates that companies with a formalized transition plan are more likely to experience successful ownership transfers.
Business owners anticipating an exit within the next four to five years must begin laying the groundwork now. By focusing on the three pillars of exit readiness, they can significantly enhance the likelihood of achieving their desired outcomes. It's not just about preparing for the end but also about fortifying the business's legacy for continued success under new stewardship.
For further insights into the importance of exit planning, explore resources provided by the Exit Planning Institute and BizBuySell's Insight Reports.
© John M. Leonetti
Talking the Language of Exits
Today's business owner is largely without a solid plan for the exit from their business, despite the fact that it is the most important financial (and lifestyle) transaction of their lives. The delivery of this message begins with an 'exit conversation' with business owner prospects and clients. This is where the 'rubber meets the road' and advisors need to be willing and able to begin this conversation and follow through on delivering exit solution to owners.
Exit Strategies & Diversification
An exit strategy plan coordinates with your personal goals to allow you to exit your business in a manner and a time period that you find most appropriate. And diversification is a key component to securing the success that you have worked a lifetime to achieve.
Bouncing Out of This Recession
Recommended Reading – in this book the author brilliantly discusses how to deal with trying times and develop business confidence and resiliency so that you become stronger as a result of the challenges that you face.
