Improve – Phase 3 of the Exit Planning 2.0 Framework

The five-part Value Scout Exit Planning framework, otherwise known as the Exit Planning 2.0 framework, puts the value at the heart of the exit planning process and helps advisors solve the central problem most owners face in achieving a successful transition – their business isn’t worth enough. Read this article for a high-level overview of the Exit Planning 2.0 Framework, or access this webinar for a summary of all five phases.

The Five Phases of the Exit Planning 2.0 Framework:

1. Define and Measure the Problem
2. Analyze
3. Improve
4. Re-assess
5. Exit

The First 2 Phases — A Quick Recap

The first step, the Define and Measure Phase, is where we determine the baseline value of the business. We conducted a formal financial needs analysis and worked with our client to develop a Personal Financial Plan and a Personal Readiness Assessment. The assessments’ findings helped us accurately articulate the business owner’s needs for retirement and goals post-retirement.

In the second step, the Analyze Phase – we conducted a few reality checks with the business owner, and we ideated how their company should look in the next few years. Next, we designed a long-range strategy to fill the existing gap between the company’s present situation and where the owner needs the business to be at some agreed-upon point in the future. And to do this, we once again used tools offered by the Value Scout Platform–The Exit Modeler and Guided Discovery Session, to be specific.

Phase 3 — It’s Time to Drive Value Creation

So, now we’re entering the 3rd phase in the process. Our long-range strategy gave us a clear picture of how the annual plan will look, and it also gave us the ability to keep value creation at the heart of our planning process. Now, the question is–how are we going to execute and drive value?

So let’s break this down further. The Improve Phase has four aspects to it:

1. The Value-Based Plan
2. The Business Operating System
3. A Risk Reduction Program
4. QA Procedures

Let’s look at each phase in more detail:

#1 – The Value-Based Plan

One of the first things we need to do is ask ourselves the simple question–are we allocating resources to non-valuable work?

Resource allocation is one of the most critical steps in business planning. Yet, all too often, business owners get it wrong. They allocate resources to low-value or non-value added activities simply without thinking about it. We have to carefully work out exactly which and how many resources the business will need. Generally, we’re looking at a few essential resources to be precise:

• Financial Resources (cash)
• Fixed Assets/Equipment
• People (staff, suppliers, and other vital relationships

The most important thing to be done is to detail all the resource requirements in your strategy and plan. When you do this, there are two benefits:

• Potential investors or potential business partners are always interested in this level of detail. How many resources will it take to create an additional $1 of marginal revenue? What are those resources required? These are simple yet critical questions, and investors will want to understand if they will get involved with your business.
• You will be able to identify whether your resource allocation plans need revising. Are you allocating resources to unimportant tasks? Could you allocate resources more efficiently? More strategically? More effectively? You simply cannot answer those questions unless you have clarity on where resources are doing (or should be going) now.

Specify clearly and thoroughly the initiatives you will take to make your growth strategy work. For instance, when it comes to resource allocation, drill down into the details, describe each resource the business has, their position in terms of the value, and their role in helping you achieve those business objectives.

And in case the business doesn’t already have these resources (cash, assets, or people), your plan must detail how you will generate any of these resources by future activity, whether your project entails recruiting more people, spending more on marketing to open new opportunities, or buying more supplies or equipment.

Value Scout has an algorithm that calculates what value creation means on each of your main initiatives, so when you work through your annual or even quarterly plan, you know precisely the value you stand to create by executing on each initiative.

#2 – The Business Operating System

Every great business requires an engine that makes it work. Good ideas mean nothing if they’re not executed. It’s often a bitter pill to swallow, but business owners need to face the reality that the business needs to grow both structurally and financially to build the value the owner wants or needs. And this is where a Business Operating System comes in…

For business advisors, this is one of the more essential tools of the trade that will help them turn a client’s organization into an ongoing business worthy of purchase. How does a Business Operating System help the entrepreneur? An effective Operating System enables:

• The company to run itself without much involvement from the owner
• The operating systems to contribute towards positive cash flow
• A proven growth strategy for generating enterprise value
• Improving cash flow
• Growth and diversification within the customer base
• Proven scalability

Values + Process + Tools + Communication + Leadership

When we are working through the Improve Stage, we are working through the heart of the entire value creation process. This includes everything from process, tools, communication, and leadership. Each of these components contributes to scaling the enterprise value upwards to where it needs to go.

#3 – A Risk Reduction Program

The three main value drivers in any business are earnings, growth, and risk. As we saw all too clearly in the last year, risk can take various forms. There is undoubtedly systemic risk in the broader economy associated with industries and geographies that reasonably affect many companies and are difficult to control. Very few executives saw the pandemic coming. That said, some were more poised to deal with the unexpected results it portended.

That said, the main form of risk we’re interested in here is “company-specific” risk. This is a risk we can most readily influence. This is risk associated with client concentration problems, heavy reliance on key people, and lack of well-documented processes – any type of risk that would jeopardize a new buyer’s future earnings but could be directly addressed by the current owner.

We can, and must, develop an active program to address this type of risk proactively. Every business owner should be thinking about and working to mitigate this type of risk (both for their sake and to increase the potential value of the business to a potential buyer).

#4 – QA Procedures

How do we build higher likelihoods of success in the initiatives we undertake? It’s important to incorporate Quality Assurance (“QA”) into the process. QA is the process we’ll use to show how the framework works and achieve the desired outcomes. For advisors that use Value Scout with their clients, this sits at the heart of the Value Scout Platform. What most of you will call backlog, we call ‘work undone inventory’ or ‘findings.’ After establishing baseline value (V0), Value Scout helps you to maintain a backlog of things that need to be fixed soon. If we miss this crucial step, it’s challenging to succeed.

We are building more than simple guidelines; we create a highly cohesive execution plan that will ensure a higher likelihood of a successful outcome. We must develop and document the processes and procedures to ensure success for you and the business owner. But success does not just have a defined function; success is a combination of leadership and strategy. The human element cannot be overlooked at any point here, as it is the element that will actually make things work for all of us.

How Value Scout Helps in the “Improve” Phase

Value Scout has already helped you establish the business’s baseline value and value growth target. We’ve identified the Value Gap; the next step is to formulate a long-term plan and break it into annual goals and quarterly targets.

To do this, Value Scout offers several tools and artifacts, such as the Value Correlated Annual Plan and the Traditional Operating Plan. Using Value Scout, business owners can assign each initiative to undertake a target value and assign and align their leadership team to those individual initiatives. The artifact Work Undone Inventory, which we also call backlog or findings, will give the business owner the exact picture of where they stand today, what needs to be fixed immediately, and what needs to be set in the interim or longer term.

See Value Scout in Action

Advisors and their client’s leverage Value Scout to identify their present value, articulate their desired future value, and model and implement plans to help them get there. Schedule a demo to learn more.