Our main goal at Value Scout is to help advisors and entrepreneurs create value in advance of a potential ownership transition. One of the keys to doing this well is having a framework for approaching the critical value creation work that must happen in the years leading up to a client’s exit.
The Big, Hairy Problem with Exit Planning 1.0
After 20 years of working with businesses and owners through transitions, it’s become abundantly clear to me that value (or rather, the lack thereof) is the central problem in every transaction. It’s the reason transitions take longer than they should. And, it’s why an agreement is not reached between parties to the transition or why transactions fail.
We can’t agree between two parties because the selling party usually thinks their business is worth more than the market is willing to bear.
Exit planning 1.0 is geared towards preparing a business for a sale. Exit planning 1.0 is a checklist exercise, and it doesn’t address the central problem – value. As outside advisors or even owners and entrepreneur founders, we need to weave value into everything that we do. We must focus on value in our annual planning cycles, quarterly business objectives, and weekly interactions. We can’t just plan for an exit 18 months before it happens. We have to plan for value creation every day to be ready for an exit when the time is right. The Exit Planning 2.0 Framework does just that.
An Introduction to the Exit Planning 2.0 Framework
We’ve intentionally kept our framework pretty straightforward. It has four main steps, and the fifth one is an off-ramp. It’s a cyclical process, and we keep value creation at the heart of the entire thing.
It is a deliberate framework for improving value. It is in a circle, but it has a series of layers. Every node has another layer beneath it, and a series of sub-components go into each one. We’re only going to go to the second layer in this post. But each one of those layers or nodes can be broken down into a more granular fashion as well.
At a high level, the framework follows a simple logical process. It starts with defining and measuring the problem, followed by an analysis phase to understand the facts better. Of course, what follows this is an improvement phase where we have to focus on improving the business asset. Then, a reassessment phase, in which we check our work and make sure that we’re heading in the right direction. Finally, we loop back through this essentially as many times as necessary before we decide to go to market.
Why is it Called a Framework?
There are different types of methodologies for all sorts of things in life. Principally, the difference between a framework and methodology is that a methodology is a much deeper, more prescriptive way to do something.
It is complete and exacting in the way that it is assembled. There are assets and testing procedures and all sorts of things that guide how you get to an outcome by having exacting detail of how you work through the process to get there.
On the other hand, a framework does not involve exact details. In exit planning and value creation, we believe it’s essential to have a framework rather than a methodology because we are trying to apply one system to an essentially infinite number of companies and situations. And if we look at the way that each of those companies is constructed, and we look at the problem statement that is associated with each one of those, it’s going to be different.
Suppose one company we are working with has a problem with its sales and marketing. If they cannot put a team together, they cannot grow. This kind of problem is different from another company with a quality control issue and cannot get a quality product out the door and has a really low first-pass rate.
So, if we try to develop a very authoritarian system for value creation, it will be hard to address this same myriad and different sorts of issues. On the contrary, a framework is intended to be loose. It allows all the advisors, regardless of their specialty, to bolt their expertise into it and solves the problems they are good at without focusing on hitting all the blocks.
With the Exit Planning 2.0 framework, we’re not trying to delineate every single exacting step that advisors go through. Instead, using Value Scout, we give you some of the toolsets that help you get there and deploy what you do as an individual advisor with clients in the best way possible.
A Quick Look at the 5 Phases at a High-Level:
The first step in the Exit Planning 2.0 framework is defining and measuring the problem. As an advisor, this is where you should start with the client when you’re working with them for the first time. It is a client intake sort of process and a defining measure phase. We need to accomplish three things in this step:
- Baseline Value – We need to determine the baseline value of their business to plan the road. We have to understand and assess our starting point.
- Financial Needs Analysis – Analyzing every aspect of an owner’s wants and needs is essential in exit planning 2.0 and traditional exit planning. It allows us to articulate where we are trying to solve for what it will take to get there.
- Goal Articulation – Articulating goals is vital to know our potential exit options. It helps draw the road map ahead and see that we are moving in the right direction.
Suppose, in working with an owner, we decide to get to $25 million in enterprise value. In the analysis phase, we need to understand what we will need to get there.
- Reality Check – We have to start with a reality check. Is reaching the goal even feasible and viable? Does the business owner have the burning desire it’s going to take to achieve this goal?
- “To be” Company – It’s one thing to say we need this company to be worth $25M. It’s another thing to identify what that business looks like. We need to sit with an entrepreneur or the leadership team and work with them to determine what the company will look like five years down the road when it’s achieved its value creation target. We’re essentially designing the business we’re building.
- Long Range Strategy – This is, of course, the strategy work that many consultants do so well. It’s the phase where we define the strategies we’ll use to close the gap between where the company is today and where we are trying to take it at some clear point in the future.
So, we have done reality checks, we’ve visualized the “To Be” Company, and devised a strategy to grow value. Now, we need to make it happen. This is the planning and execution phase.
- Value-based Annual Plan – We need to create a value-based annual plan by allocating our limited resources wisely and prioritizing those initiatives that will drive value creation.
- Ops Execution and Business Operating System – Every business needs an operating system. Whether you work on EOS or something else, you need a process for translating your annual plan into quarterly rocks and weekly task lists.
- Risk Reduction Program – We need to identify company-specific risks and take them off the table to increase value.
- QA Procedures – Finally, we need to build a process to increase the likelihood of achieving an identified outcome in this stage.
At this phase, we have come full circle. We have gone through the initial intake, analyzed the situation, and gone through an improvement phase. Now, we have to go back and check the inputs to ensure that we are still working towards the same objectives.
- QC Operations – We need to check our results so far and see how they aligned with what we had planned. Did we achieve what we thought we would?
- Re-baseline value – Now, it’s time to re-assess value. How have we have done in value creation? We need to re-baseline value accordingly.
- Re-baseline financial needs – We need to re-run financial modeling, go through goal articulation, assess what has changed in the industry that can impact the company, and re-assess the financial needs and wants of the owner. In short, we have to make sure that the goalposts didn’t move on us.
A lot of advisors miss this fourth and critical step in the process. When you do, it often results in the exit taking much longer than what was initially planned. We need to re-assess at regular intervals and keep adjusting the value to meet our goals on time.
So, we have gotten to the point where we’re ready to off-ramp this thing at some point. When we get there, we need to work on three things here.
- Rules of the game – The business owners or the leadership team must know what an exit transaction looks like. Just like selling a house or a car, they need guidance on how the market for a privately held business operates.
- Pre-flight checks – This is actually what we’ve historically called Exit Planning 1.0. It is the pre-diligence work, which has been called exit planning for the last 25 years.
- Execute transition – Finally, and most importantly, we help the owner execute the transition.
Take the next step
Of course, this is a very high-level overview of the Exit Planning 2.0 Framework. I go into much more depth in each of the five areas in our introductory webinar on the topic. Access the webinar recording to go deeper inside the framework. Or, schedule a demo to learn how to leverage Value Scout to drive your exit planning work.