As a business owner, it’s critical to have an exit strategy so when it’s time to leave your business, you exit on your terms while increasing the chances of maximizing business value. That’s important because, for most owners, the business is their single largest asset.
“Exit planning is an essential part of an ongoing business strategy and something you can’t afford to leave on the back burner,” Frank Fantozzi, CPA, MST, CDFA, AIF®, CEPA, president and founder of Planned Financial Services says. “Waiting until the last minute to start may not provide enough time to fix issues that drive value in your industry. That could prevent you from obtaining the highest value, possibly leaving millions of dollars on the table.”
Smart Business spoke with Fantozzi about how to create an exit strategy and the importance of starting now.
How can an owner begin to prepare for an eventual sale?
There are generally three choices when selling a business: Sell internally, sell to a financial buyer looking for a specific rate of return, or to a strategic buyer who could potentially pay more as they have systems and processes to better scale the business for a higher ROI. Regardless of which option you choose, a successful exit relies on three key factors: Owner readiness, business readiness and state of the capital markets.
Owner readiness requires a plan to step away and addresses your post-business life. Owners often underestimate how much the business contributes to their personal lifestyle. An analysis based on your personal assets and projected assets from the sale helps determine if you will have enough to maintain your lifestyle and accomplish other goals.
Business readiness is not just about how big your company is but about being best in class. If you achieve Best in Class (BIC) status and sell at the right time — even if you’re not fully ready to retire — you’ll have a better chance of receiving the highest value. The common language for valuing a business is EBITDA (Earnings Before Interest Taxes, Dividends and Amortization). Often, you’ll see business value reflected as “X” times EBITDA multiple. BIC businesses lead competitors within their industry and likely will be offered more. Finding out if your company is performing BIC will help indicate if it will receive its best offer by a higher multiple than a non-BIC competitor. In addition, each industry maintains Key Performance Indicators (KPIs) that help determine if a business is performing well compared to its peers.
One component you can’t control is the state of the capital markets. Economic conditions, access to cash, and merger and acquisition activity can all influence multiples. However, ensuring owner and business readiness can increase the odds of taking advantage of favorable capital market conditions so you don’t leave money on the table. Ideally, you’ll exit on your terms, when the business is at its peak and the markets are paying higher than normal multiples.
How can a business owner start to create an exit strategy?
Working with a CEPA professional to assess owner readiness and complete a detailed professional valuation will help provide the answers needed to improve your business. Remember, if the business is your key financial asset, it’s also the linchpin in your personal financial plan.
Your exit strategy is a business strategy because it is part of a continuous cycle of making improvements and reassessing to determine if you want to continue to grow or sell. Starting early is also critical to avoid risks associated with the ‘5Ds’ (death, disability, divorce, disagreement and distress) that could dictate unforeseen outcomes.
Treating exit planning as an ongoing business strategy will show you where you and the business are now and where you need to go. This allows you time to make any changes needed to increase the value of your company as you prepare to exit on your terms with the highest degree of personal and financial success. ●
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