Exit Planning – Why it Matters
“I’m ready to sell my business.” Many business owner conversations with Baldwin & Clarke Corporate Finance (BCCF) (our investment banking arm) begin just that way. Unfortunately, their businesses may not be as ready as they are: at least not for what they think it’s worth or need. What it’s worth to him or her may not be what it’s worth from a buyer’s perspective. One expert estimates that only 3% of businesses are capable of being transferred in a way that achieves the owner’s goals and objectives.
I hasten to add that BCCF has successfully brought several businesses with good cash flow and operating history and/or “hot” technology to market without the need for an Exit Plan. In those instances, it’s about understanding the company’s strengths and preparing a “package” that successfully presents its story to a select group of potential buyers. The rest of this piece focuses on some aspects of the process required to get a business to that point.
After 44 years of working with entrepreneurs and family businesses, it’s safe to say that we have pretty much seen it all with regard to business transfers. Here’s a little of what we’ve learned about creating successful business owner transitions.
Fact: Ideally, business owners seeking to create the maximum transferable value should begin planning 7 to10 years before a sale or transfer if the goal is to maximize value. However, in reality, 7 to 10 years before a sale, the average business owner’s thoughts and efforts are all centered on growing the business. An experienced Exit Planner can guide the early exit planning process so that the business owner can continue to focus on running his or her business, but do so knowing that those efforts are directed toward value creation (see the value driver discussion below). Most business owners haven’t sought the guidance needed to develop a value driven Exit Plan, and only thinking about the process two or four years before they think they will want to sell or transfer the business. Even then, however, a sound Exit Plan can be of great value. That’s what our fee only planning and wealth management firm, Baldwin & Clarke Advisory Services (BCASI) helps them create.
Note the words “transferable value”. Transferrable value is what your business is worth to someone else, without you. And “transfer” doesn’t just mean sale. True, it may be a sale to an outside third party, but can also be a transfer to a family member(s), an ESOP or a key executive(s).
We have Assessment Questionnaires that can help you think through these key questions. If these are of interest, you can have a copy with just a few mouse clicks (Download a copy: Exit Planning Assessment #1 – My Goals).
Many components make up an Exit Plan designed to produce a transfer that’s successful for all parties: transferor, transferee, family and employees. The early stages of the process involve getting the business owner’s personal financial, estate and business continuity plans in order. Next is determining the most likely exit approach, i.e., to family, employees or an as yet unknown third party. All of the principles of Exit Planning remain the same no matter who the intended transferee is. What does change, are the strategies the business owner uses to extract the value.
Value creation is the Holy Grail of Exit Planning (and of a proven investment banking process at the time of sale). It’s this that takes the seven to10 years mentioned above. It’s all about identifying a company’s potential value drivers and executing a plan to develop them.
Fact: A company with strong value drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average value drivers.
Take a look at the chart below. It shows the multiples of EBIT at which M&A transactions took place in a number of industries in recent years. The red line in each bar on the chart represents the median EBIT multiple. The bars themselves show the range of multiples. Be assured that those companies whose sales prices exceeded the median understood and focused on their value drivers.
Again, we have an Assessment Questionnaire that can help a business owner evaluate how his or her company is positioned with regard to the nine key value drivers that are critical to almost every business (Grab a copy right here: B&C Value Drivers Guide).
Here are just a few of the nine:
As you can imagine, getting a business to the point where it is well positioned in all of these four areas, to say nothing of the other five, takes time.
A business owner who fails to adopt and execute an Exit Plan typically sells his or her businesses for less than it’s worth to him or her, and for less than what he or she hoped for or needed. Sometimes the transfer is to a child or children who then fail, as they and the business were ill prepared. In those cases the payments due the owner cease and he or she may be forced to take the business over.
Sadly, in some cases, the business simply dies when the owner retires.
In a future blog, we’ll address a few ideas on how to reward and retain key employees and what is needed for a successful business continuity plan.
Charles (“Chuck”) Baldwin
Baldwin & Clarke Advisory Services, Inc.
About the author: Chuck is the co-founder and principal of The Baldwin & Clarke Companies and the President of Baldwin & Clarke Advisory Services, Inc. Chuck specializes working with entrepreneurs, individuals, and their families to deliver high touch planning solutions designed to create, preserve and transfer wealth.