Define the Problem – Phase 1 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. You can also access this webinar for a summary of all five parts.

The Five Parts of the Exit Planning 2.0 Framework:

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

In this article, I dive deeper into Phase 1 of Exit Planning 2.0 Framework — Define and Measure the Problem. This first phase has three essential steps:

  1. Establish a Baseline Value
  2. Do a Financial Needs Analysis
  3. Articulate Goals

#1 – Establish a Baseline Value

In my experience, the first and most important thing in planning for a successful transition is understanding your starting point. I often like to tell advisors, we can quickly build a plan to get to Albuquerque, but only if we know where we are. How we get there looks different if we’re starting in Santa Fe than it does if we’re starting in Washington D.C.

Planning for a transition is no different. We have to establish a baseline value to build an effective plan for where we want to be. We call the baseline value V0. It is the initial value of the business today with which we’re starting the exit planning process.

Business owners usually guess the value of their business. And the number they use is never on the lower side. Usually, they have a highly inflated idea of how much their assets are worth. Taking this imaginary value as a baseline is a sure-shot recipe for exit planning failure.

When exit advisors need to work on this baseline value for the next four to five years, they must ensure it is close to reality. So, clearly defining V0 or the starting point in business is extremely important.

#2 – Do a Financial Needs Analysis

The second essential point in Phase 1 is analyzing the financial needs of the business owners. Here we need to ask questions like:

  • What are the wants and conditions of the entrepreneur at the exit?
  • How much do they NEED in the future to sustain their current lifestyle?
  • How much do they WANT from the sale of their business?

We need to understand the outcome and where we drive this ship over the next couple of years. A formal exercise working through the financial plan is crucial.

When advisors work with business owners, they usually give a gut check number, $25 Million. The business owner would say that I want to get $25 Million from this asset. And no matter how much the exit planners poke and prod about the reason why $25 Million, the business owners remain unaffected as they have picked it as their goal.

As an advisor, you cannot base your efforts on a gut check number, only to find out that the number was not good enough at the end of the day.

Financial planning is something that advisors need to do in the initial stages of working with an owner – not when they’re taking their business to market. This is a transaction failure point, and advisors need to ensure that they do not get into the problem of realizing the number the client told you three years ago is not good enough when the business goes to market.

I’ve seen this happen many times in my 20+ years of experience. The business owner says they’d be happy with a $10 million transaction and that he’d be set for life. But, we have to remind the owner that he is already over 50, has a high annual spend, he has become used to this level of personal cash flow, and we are looking at a 35-40-year retirement. Also, it’s not $10 million post-tax; it’s $10 million pre-tax. So, maybe those numbers won’t work. And, he needs that business to be worth much more than he says he’d be happy with.

It is OK to have a gut check; however, it needs to be supported by detailed financial planning. It is essential not to start the exercise all over again after putting a couple of years of hard work into value creation predicated on the understanding that we were driving this business to Albuquerque when we needed to be driving it to San Francisco.

#3 – Goal Articulation

At this point, when we’re talking about goal articulation, we are referring to the business owners’ life goals, not necessarily the company’s goals (the outside the building stuff; not the inside the building stuff). We need to ask questions like:

  • What does a successful transition look like?
  • Is it an internal sale to employees or family?
  • Is it an external sale for cash?
  • What will the owner do once they retire?

We also need to find out what we are trying to get out of this. When you have a clear understanding of the business owner’s goals, only then you will be able to answer the following vital questions:

  • How and when do they plan to retire (or maybe they plan to die on their desks)?
  • Do they have any charitable goals post-retirement?
  • Do they want their family to get involved in the business?
  • Do they want to sell to their key employees?

As an exit planning advisor, I think you must get inside the legacy of the business owners. We all know how founders say they don’t want to sell the company, get shut down, moved offshore, or any variation on that theme. In my experience, legacy is of great importance to many folks. For the vast majority, they only get to do this once. Ultimately, a conversation about legacy often drives us to where we’re going to wind up at the end of the day today.

Working through the goal articulation process early enables you to start steering the ship towards the style of the transaction the owner is looking for and building a company that fits what’s needed for a successful transition. This includes ensuring the organization has the right staff to fits that style of transaction over the next couple of years.

Value Scout Tools That Can Help You in Phase 1

A tool gives some output, and an artifact is a result. Value Scout offers a variety of tools and resources to help you work through Phase 1 of the exit planning process:

  • Estimate of Baseline Value – To start, every time you bring a client onto the Value Scout platform, that client receives a baseline estimate of their business value, V0. This is an analyst-driven, technology-enabled valuation. It’s far more accurate than a chart’s simple “earnings multiple.” Yet, it’s far quicker than a traditional valuation–and it’s included in the price of the platform!
  • A Personal Readiness Assessment and a Wants and Needs Template – We have templates for both that you can download from within the platform.

One critical feature of Value Scout is that it enables you to articulate and visualize the value gap. One of the essential steps of Phase 1 is you, the advisor, developing a Personal Financial Plan for your client. How much do they need this business to be worth to retire? And when do they need to realize that value?

With that information in hand and an accurate assessment of baseline value from the platform, your client will see an obvious depiction of the gap between where they are and where they need to be. It looks something like this:

See Value Scout in Action

Advisors and their clients leverage Value Scout to identify their present value, articulate their desired future value, and model and implement the scenarios that will help them get there. Schedule a demo to learn more.

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Author Summary

Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.

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