To become a highly successful exit planner and deliver on the assignment, you need to have that conversation about value early and often with your client. Each discussion on the topic should go deeper into detail.
For exit planners to successfully do their work, they need to solve that single, central problem of a business’ value shortfall. Even if the company is a cash-producing asset, its current value is seldom enough to sell at a 4X or 6X multiple. Your job is to help the business owners create value, and for that, you need to have the value conversation.
Reasons Why Many Exit Planners Fail to Have the Value Conversation
Most Advisors are Too Timid
Many exit planning advisors tell business owners about growing their revenue or creating cost reductions; however, they resist taking that conversation one step further to discuss the impact of these things on enterprise value.
They approach their work as a product or a process and focus on delivering a sound business strategy while failing to solve the central value creation problem. As an advisor, you need to change your mindset from being the quarterback on the team to becoming the client’s mentor in the value creation process.
The best advisors act as mentors or coaches to their clients. They deeply understand their business model and needs and what it will take to get their desired exit. They educate their clients about enterprise value, help them stay focused on their desired future state, and guide them towards growth and development.
Most Advisors Focus on Only One Dimension of Value
Even when exit planning advisors begin to talk about value, they limit the conversation to either:
- the value of the personal estate of the business owner and their retirement needs, or
- the value of the business and how to grow it.
They pick either end of the stick and start working from there, not concerned about assessing the goals at the other end and addressing them, too.
The best advisors address both dimensions of value early and often. They serve their clients by assessing the value of the estate and the needs of the estate. And they do not stop there. They calculate the business value and its contribution to a successful transition.
These excellent advisors go through a valuation and financial process, either simultaneously or at nearly similar times. By doing so, they determine the company’s current value.
Get More Granular on That Value Conversation
When talking about building value in the context of exit planning, the best advisors ask questions like:
- How much does value need to grow for a transition to be successful?
- What are the inputs to those assumptions?
- What happens if those inputs change?
- When will we revisit the topic?
For instance, let us consider Tom Parker, 58, the sole owner of Arnold Food Processing Inc. Tom is married to Julie, 58. He earns a $250,000 salary. His exit objectives include retirement at 63 and a post-retirement income of $200,000 for 30 years. Tom does not have a successor.
His company has an annual cash flow of $250,000 and an estimated current business value of $1–1.25 million.
Tom must sell his company for $3–3.5 million to net $2.5 million to finance his post-exit income needs, given the number of years he wants income and the assumed rate-of-investment return of 7 percent p.a.
Therefore, Tom needs to increase the value of his company by at least $2 million to achieve his exit objectives. This calculation answers the first question: How much does value need to grow for a transition to be successful? The best advisors talk about this in detail with their clients.
What are the inputs to those assumptions? By identifying the value gap and showing the same to the client, you can help them decide what to do to close this gap. To understand the context for achieving their goals, your client needs to know the extent of the value gap and the time available. The deadline creates responsibility for all parties involved and motivates them to stick to the plan.
Assuming all the initiatives may not align with the plan, you need to discuss what happens if the inputs change? While most advisors are consumed with their strategies and hardly doubt them, the best advisors have plan B ready and can pivot to the alternative plan if something does not work.
Further, you also need to decide with the client the last question: When will we revisit the topic? This demonstrates how finely detailed you need to go with the value conversation.
The best advisors know that having a conversation about value with their clients early and often is crucial in exit planning that they cannot neglect. This conversation forms the foundation on which they need to build the exit planning process and systems to ensure the successful completion of their projects.