Re-Assess – Phase 4 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 simply 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 3 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. We have come full circle when we reach the 4th step of the Exit Planning 2.0 Framework. In the 1st step, we defined and measured the problem, determined the baseline value, and conducted a financial needs analysis and goal articulation.

Then we went on to do reality checks, ideated how the company would look in the future, and came up with a long-range strategy to fill the gap between where the company is now and where the owner needs or wants it to be the future. Finally, we began to make it happen with a Value-based Annual Plan, Ops Execution, Risk Reduction Program, and QA Procedures.

In the third step; the Improve Phase – we developed a value-based plan focused mainly on where and how to allocate resources to drive value creation activities; we established a business operating system to build our ability to drive operational excellence; we introduced a risk reduction program to weed out as much “company-specific” risk as we can; and, finally we introduced QA procedures to increase the likelihood of achieving the value target we’re looking for. And, of course, we implemented a whole range of value creation activities associated with these plans.

Phase 4 — Its Time to Gauge Our Progress

Usually, phase four occurs 9-12 months after the Improve Phase. It’s the point at which we check our inputs and ensure that we are still working towards the same objectives. Essentially, we’re seeing how practical our value creation activities have been, assessing whether we’re ready to exit or if the goalposts have moved, and then determining what we’ll do differently as we advance.

The questions we ask in the 4th phase are:

  • Did we do what we said we were going to do?
  • If not, why? What broke?
  • What do we learn from where we failed?
  • What are we going to do better this time?
  • What are we going to do differently this time?
  • And, how can we improve things from now on?

#1 – QC Operations

In the world of software, QC is about testing the functional aspects of the application in development against the business objectives put forth in the design phase. Does that rollover state do what it’s supposed to do? Does that filter tool work the way it was intended? Is the design being rendered correctly as it was designed? If yes, great. If not, why not? What will it take to fix it?

Driving value creation is vastly no different. At this point, we have to ask ourselves – Did what we think was going to happen actually happen? Maybe more specifically, did we get a quality result from what we just built? Did we do what we said we were going to do? Or did we miss the target? If we missed it, why?

It’s this iterative loop that enables us to drive better future value creation activities if we’re not as successful as we’d like to be in the first place. Essentially, we need to measure what we build and reassess.

#2 – Re-Baseline Value

This is a step that is frequently ignored. At this point, we need to go back through our valuation process to assign a new value – call it V1. Did our value creation efforts have the intended effect? Did something change in the marketplace? Again, we need to determine if our starting point has moved. And, we need to know how far we moved the needle in the first year. Did we move it enough to stay on target with our value creation and future exit goal? If not, why not. And, more importantly, what are we going to do about it.

#3 – Re-Baseline Financial Needs

Just as current enterprise value has changed, so have other value-based assumptions. At this point, we need to re-run financial modeling, go through goal articulation, assess what has changed in the industry that can impact the company, and re-assess the financial needs and wants of the owners.

We need to re-baseline financial needs. So, we need to ask, has something changed in the rest of the portfolio, the market or the owners’ financial situations changed the financial plan?

Let’s assume that nothing much has changed, and we’re sort of consistent. But what if something has changed? So, we just rerun financial modeling on that.

Suppose the business is a big piece of the owner’s portfolio, and we had decided that we’re going to create x million dollars of value this year; what happens if we didn’t? For example, let’s assume we had a $10 Million company at V0, and we decided we wanted to get to $25 Million in five years. So, we had to get $3 Million every year. What if we got $0 this year? How does that impact our plan? Well, it resets it.

We’re now at V1, and the value is still $10M. Assuming the exit date hasn’t changed, now we have to drive $3.75M in value creation each year for four years to get where we want. So, we need to grow faster. Or, we need to change the number that we’re chasing; we can’t have $25 Million anymore. If we’re still going to do this in four years (as of now), it’s got to be $21 Million. We need to discuss and ask them what we want to do. But we have to redo the goals.

It is super essential to re-base financial needs. And we think it’s something a lot of people miss if they are not going through this value creation process on a routine basis.

We just keep moving to the right. We say that we are going to exit in three to five years. We believe that it’s always three to five years and never just gets smaller because we are just moving yardsticks. We got to have these conversations to re-baseline value, re-baseline financial needs, and re-define the value gap.

Often, It’s Wise to Revisit the Owners’ Readiness Assessment

As already stated, we believe that to have an accurate picture of what we won and how we attacked our losses, we should update our valuation, re-baseline value, and the financial plan. It’s also usually wise to revisit the personal readiness assessment. We need to get under the hood again, find out where the founder is, and address if anything has changed there.

We need to understand that we can still achieve our goals. So, when we talk about feasibility, viability, desirability. Presumably, desirability has not changed, and we’ve done an excellent job at goal articulation at the beginning. And nothing has materially changed in somebody’s life. Well, the desirability of the goal is probably still there.

Now we’re talking about feasible and viable. And that’s a critical discussion to have. And again, we need to ask: If we can’t do this if it’s no longer feasible, what are we going to change to make it viable?

Value Scout Tools for Phase 4

Tools like the Value Scout Valuation Update and Personal Readiness Assessment can help you assess your client’s goals, determine how far they’ve come in their value creation efforts, and establish a new set of priorities for the value capture strategy going forward. Also, they can help you determine if maybe it is time to exit—more on that in the next post in our series.

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.

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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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