Without determining the owner’s goals, a business transition is bound to go awry. Therefore, a clear vision and mission are essential when planning your client’s exit.
Over the years, the business world has witnessed numerous successful exits and some forced and unsuccessful ones. A forced sale happens when the owner is not ready but has to proceed with the exit due to death, disability, divorce, or other unexpected circumstance. A forced exit leaves the company with questions concerning its value and its employees and investors or partners’ future. So, what could force your client’s exit?
Exit planning helps owners paint a clear picture of their life post-retirement. A successful exit focuses on building the company’s value and allows the owner to choose whom they want to sell and when. With a clear timeline, owners can decide what value they want to sell, which benefits them and the company.
3 Tips to Help Your Client Create Value and Successfully Exit
Know the Business Value
Many owners ask if a business valuation is necessary to build value. The knowledge gap they face needs to be filled with correct information, so yes, a business valuation is necessary to build value!
Before an owner asks for the desired sale value, it is essential to determine the company’s current market value (CMV). As an advisor, you must make your client understand that they cannot sell the business for an inflated desired value. Calculating the baseline value of a company is the first step in exit planning and value building. Your client should be aware of their post-exit needs to determine how much more value needs to be built to reach the value they want.
As an advisor, you must also understand that an owner is emotionally attached to their business. The owner’s years of hard work and emotional investment usually lead to estimates exceeding the business’ actual value. To correct this, hire objective professionals to calculate the business value. An inaccurate business valuation prevents owners from achieving their desired exit goals.
The next step is to identify the business areas that lead to the value gap. This is done by reviewing the valuation data and mapping the company’s performance based on market position and the value it creates for its stakeholders, employees, and competition. The goal is to turn these weaknesses into value drivers or eliminate them. Though a time-consuming process, a valuation will help your client define the business’ strengths and weaknesses and guide action to create a valuable company.
Set a Timeline
Many clients are anxious to know how long their exit will take. The answer depends on the value gap. Not all businesses have similar value gaps: some might have fewer clients, some may be struggling with ineffective management, and some might have everything on point but be dependent on their owners. An exit plan without a timeline is like shooting an arrow in the dark: a timeline helps owners set a clear target for what they want from their exit.
Exit planning advisors help companies bridge the gap between their resources and the resources they need. For example, there might be a situation when the owner is ready to exit, but the business is not. This happens when a business depends on its owner for daily operation. Then it is advised to postpone the exit and use the extra time to transition to a self-sustaining company. A truly independent and self-sustaining business is more valuable than the one dependent on its owner.
The exit timeline also depends on the nature of the transfer. For example, the owner may not be in a hurry with an internal transition or family succession. The owner might also stay involved in the operation. However, a company liquidation would likely be a faster process, as the owner needn’t look for a buyer. Instead, they can exit their company by simply selling all its assets.
An advisor should present all the available transfer options to owners. Select options based on current market conditions, the owner’s goals, and the company’s overall performance.
No matter the nature of an exit, a successful sale that involves building value will take time. A forced exit may incur unnecessary taxes and garner a lower price without any professional planning. Having a timeline may help companies reach their potential value, and the prepared exit plan can be executed once the owner and the company are ready.
Know the Value Your Client Wants
Any owner who wants to sell their company expects it to sell at their desired price, but they fail to bring their company to its potential when they’re in a hurry to sell. As a result, a buyer is most likely to offer a lower price than the owner estimates. This difference in the perception of the business’ value must be bridged.
The difference or gap between the value the owner desires and the price the buyer is willing to pay is based on the company’s current situation, potential, and needs to reach that potential. A value gap analysis helps determine the reasons for that gap, what actions will work best to fill it, and how progress can be measured.
Once your client has identified the desired value based on their personal and business goals, start assisting them in building value. As an advisor, you should focus on growing the value of your client’s company.
Build value by breaking down goals. When long-term goals are broken into more easily managed and completed short-term goals, productivity increases. When value gaps have been identified, breaking down goals helps assess and work on these gaps. Also, when short-term goals are completed on time, they confer a sense of achievement which further motivates people to work harder.
An advisor should always ask the client if they would like to be associated with the business post-exit. Your client must be committed to the exit process, meaning that they should be ready for the upcoming workload and finish it within the expected timeline. If the client decides not to return to that or any other business, the advisor’s job is to brief them on the implications. At this time, map out your client’s long-term goals and show them if their retirement money will sustain them in the coming years. Owners should also be ready to depart from the business on an emotional level. Failure to meet these criteria may delay the exit.
How Value Scout Can Help
You can show the exit timeline and map out a realistic exit with Value Scout’s Exit Modeler. In addition, by depicting a predicted value, owners can map out their exit timelines. The Exit Modeler algorithm helps track yearly financial objectives, which helps in quarterly and annual planning. You can determine your course of action, save time, and achieve your goals simultaneously.
Value Scout’s tools like Value Scout Valuation Update and Personal Readiness Assessment help advisors assess their clients’ goals. If you wish to check how far your clients are on their journey and want to set new priorities while determining their exit deadlines, these are the right tools for you.
If you are ready to learn more from our seasoned exit planners, join Value Scout’s Guidon Community. Value Scout also offers courses on driving value creation and understanding business value. Join us today and help your clients exit with pride.