Comprehensive Exit Strategy
What is a Comprehensive Exit Srategy? It is a detailed strategy for identifying the current value of your business, quickly enhancing its value, and developing a marketing plan to identify the ideal internal or external buyer to pay the best price for your business.
Why is a Comprehensive Exit Strategy important? When you decide it is time to exit your business you want to get the most value for what you have likely spent years building. In the absence of a CES, you will most likely waste time and money and never truly realize the net proceeds you hope for; it really is that simple.
What is the elephant in the room on this topic? Most business owners wildly overestimate the value of their businesses. It’s very likely that they have never had their business formally valued by a business transfer professional.
successful business moves through a very predictable set of organizational
developmental steps called the 5 Steps of Freedom. However, many die trying. In
fact, some studies indicate that more than 90% of businesses fail and most of
them do so as they’re attempting to climb past the 2nd step, Chaos into
Control. You need to understand where your business is on the 5 Steps to
Freedom and that will help you determine what needs to be done to help you
execute your CES.
Many business owners will say they want to develop a Comprehensive Exit Strategy just because they’re tired and want out of their business. But very few of them are ready for a CES. For example, some business owners, while still on the Creation step, realize how challenging it is to come up with a business model that is really viable and makes money, so they decide they want out. Some businesses at the Chaos step are bleeding money and run out of access to working capital before they become profitable, so they try to find a way to exit. The owner figures, “Well, it’s just going to die if I keep going this way, so I might as well sell it.” Of course, no one in their right mind would buy it at either the Creation or Chaos steps unless they get the business for pennies on the dollar.
There is a smaller group of business owners that have made it to the Control step, or even to the Prosperity step. They’ve made good money, but they are tired and ready to move on. If all they want to do is get out, they’re likely going to end up with a fire-sale situation where they sell off assets and, ideally, pay off their liabilities, and walk away with a bit of change in their pocket. And that’s okay if that’s what they want to do. But in most cases, the valuation of the business will be very low, much lower than the owner expects, often so low that after they liquidate assets, they still can’t pay off the debts of the business. Unfortunately, a lot of business owners find themselves in this situation. The business doesn’t have much value because it is just an extension of their personality. And no one will pay much for that.
The business owner needs to understand that if they want to sell a business that has a lot of value, the business has to be transformed into a real asset that produces cash flow with or without their participation. That means growing it into a Step 5, Freedom business. That’s what people will pay for.
Looking more closely on a Step 5 Freedom business, the focus is on reproducing, acquiring, and harvesting. With good cash flow, a good team, and good infrastructure, the business can increasingly run without the business owner actively participating in operations. The business may choose to reproduce itself in additional company-owned outlets or by entering into licensing or franchising. The business owner may also reproduce their success in other related business units or in different ventures altogether. The business may expand horizontally by acquiring competitors or expand vertically by acquiring companies in its value chain. At the Freedom step, the business owner is able to enjoy a wonderful harvest of free time and free cash flow. This is a business that is ready for sale at its highest value.
Here are the simple steps to creating a Comprehensive Exit Strategy (CES). There is a lot more to each of these steps than initially meets the eye.
- Target Value. Identify a target for the value of the business when completed and ready for sale.
- Current Value. You must get a current valuation of the business completed and there are options to get this done. The most common for typical small businesses is called the Discounted Cash Flow Method. The discounted cash flow method takes what the company is expected to make in cash over a specified period of time versus the debt that the company will have over that same time period and gives a potential sale value. It is strongly recommended that you create this business valuation report based on financial data from at least 3 complete periods. It is also recommended that you project at least 5 years of Net Free Cash Flow when creating the valuation.
- Value Gap. Simple math will give you this number as it is the Target Value minus the Current Value. For many business owners the size of the gap is shocking.
- Close the Gap. Using several specific Silver Bullet strategies, you can close the Value Gap and make the business much more sellable.
- Prepare the Team. You will need to surround yourself with a team of professionals to assist you with all aspects of the sale including but not limited to an Accountant, Financial Advisor and Attorney. This team will not just help you with preparing for the sale, they will help you with most effectively using the proceeds from the sale including tax strategies, investment strategies and more.
- Identify Internal and/or External potential buyers. You may need to engage with a Business Broker or Business Transfer professional for this.
critical part of successfully implementing a CES is keeping motivated through
the various twists and turns on the journey. One of the best ways to achieve
this is to continue educating yourself on the ins and outs of exiting a small
to mid-sized business. One of the most authoritative and respected works on the
subject is a book called E4: Evaluating, Entering, Enhancing, Exiting Privately
Owned Business by William (Bill) Bumstead. The author’s credentials are
impeccable and his decades of experience in the business transfer industry are
legendary. Another excellent and more recent work on the subject of getting a
small to mid-sized business ready for exit is called Built to Sell, Creating a
Business That Can Thrive Without You, by John Warrillow. The first half of this
book is a fable and the second half covers the various frameworks he has
developed. It’s definitely less technical and spends less time on the mechanics
of the actual sale of the business, but it’s a great compliment to Bumstead’s
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