- If you’re going to be highly successful as an exit planner, you have to develop a thorough understanding of how your clients’ businesses work.
- Develop a clear picture of how they make money, the risks they face, the potential approaches to mitigate that risk, what it will take in that business for them to retire, and the critical value creation strategies it will take to get there.
Now, for value creation consultants, this is just part and parcel of the work.
But, for a whole lot of financial advisors, this is a bit of a stretch. I mean, yes, you probably loosely know what your client does for a living. But, do you really understand how they make money? How do they generate sales? What do they sell? How do they sell it? How do they turn those sales into cash? And, all the resultant risks they face along the way? My guess is you might not. So, let’s look at what’s important, at least at a high level.
Related: Exit Planning Secret #3.
#1 – What drives the business?
Being an advisor, the first thing that you need to understand is what makes a business generate its primary revenue. Based on that, you need to figure out how you can prepare an exit strategy. Let’s assume that your client operates a movie theater, and as you can guess, the revenue flow was heavily disrupted in 2020; after all, there weren’t many new movies to show (heck, you could rent out a whole AMC theater for $100).
Now, chances are good you don’t have all the answers for handling that type of disruption. But, often, half the battle, at least for a financial advisor, is just being there and functioning as a sounding board as your client works through a period as difficult as what they just faced. For a client like this one that experienced significant disruption, did you make yourself a resource for exploring alternative revenue streams, for navigating the PPP to retain staff, for making difficult staffing choices, for determining short-term and long-term cash flow needs? The list goes on and on. But, the short of it is you had to understand the business to be a trusted advisor at this moment truly. And, if you didn’t, you probably failed.
#2 – What drives value?
Understanding the steps to build business value is pivotal to creating a decent exit plan if things go South. Here, as an advisor, you should have a clear idea about the key aspects of the business. Those factors will eventually contribute to the overall value of the business. So, returning to our movie theater example, your client must know what movies they have to release in any given period to remain profitable. They also need to have a roster of quality vendors that produce food and beverages for the business, which is a key driver of profit. They must know how and where to acquire staff as turnover may be quite high. They must have a clear set of operating procedures to quickly onboard staff and reduce risk to a future owner. Ultimately, the goal is to identify the mandatory aspects you must have to keep the theater operational. So, in case of any emergency, you can be able to create an exit strategy by shutting down all those factors that are not necessary for your business to stay open.
#3 – What are the biggest risks to a successful transition?
We all can agree that change is inevitable. So, whichever business your client operates, they need to change their business strategies from time to time to stay relevant. Similarly, you should have an idea of the areas that you might be able to compromise while preparing a business for and successfully executing a transition. So, if we go back to our movie theater example, well before the pandemic, your client probably had to have a sound digital ticketing strategy for customers to book seats in advance, online or from a mobile device. Lack of a clear strategy in this area would be a clear area of potential risk for a future buyer (hence, driving the potential deal value down).
#4 – Is the business owner fully aware of those risks?
One of the factors that you should be prepared for, being a financial advisor, is when the business owner is not aware of risks that could disrupt the business or aren’t clear on how or why that would be a risk to a buyer. This often comes up when the business relies heavily on 1-2 key people (often the owner) to drive revenue or when a large proportion of revenue derives from 1-2 clients.
I recently spoke with a $10M IT services firm deriving 80% of its revenue from one client. When I informed the owner, he was at an extremely high risk of total business failure. He was shocked by my comments and entirely dismissive of them. He couldn’t see the risk that posed for him or a potential buyer. So, while you gain information about the business, look for opportunities to educate clients about the potential risks they face that they’re not seeing. And, whenever possible, substantiate your claims with data.
#5 – How can those risks be mitigated?
If you are thorough with the risk factors, you can develop an effective exit plan to mitigate those risks, recapture or grow value, and plan for a successful exit. If you’re unsure how to mitigate those risks, reach out to other value creation consultants within the Guidon community with the specific expertise needed to advise your client in those areas.
#6 – What is the value the owner needs to retire properly?
Everyone needs to retire at some point in time. So, thorough retirement planning is essential to let them feel secure in the future. As a financial advisor, this is probably right in your wheelhouse. Just recognize your client needs a number. Financial advisors are often reluctant to be too specific in their recommendations due to the inherent assumptions necessary to get a single number. But, your client wants a number, and they want it to be specific. So, share your assumptions and give them to them.
Be That Trusted Advisor Your Client Seeks
Ultimately, trust doesn’t come from a simple tax strategy or portfolio analysis. Trust is earned by being there. By listening. By seeking to understand. And by providing objective guidance where your expertise is valid and helping your client locate expertise, they lack to drive to their value creation targets. If you can do all this, you can position yourself as a key member of the client’s transition team.
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