Planning for the eventual exit from your business and the transfer of its ownership involves creating objectives about what you want to do personally – whether pursuing another business endeavor or retiring – and whether you’ll be financially prepared to exit on your terms and provide your family with the lifestyle you want for them. But this all hinges on one thing – ensuring there is adequate value in the business you will be exiting.
With the clarity that building business value is your primary goal, you need to arm yourself with knowledge including:
• The current value of your business – not a guess or estimate, but an accurate assessment
• The value the business needs to achieve to enable the owner to reach exiting income objectives, which must be based on a realistic picture of post-exit lifestyle goals
This value gap may not be the only gap you need to bridge, however. Exiting business owners must be aware of and prepared for gaps created by influences such as the timing of buyer’s versus seller’s markets, differing opinions between buyer and seller regarding future growth and earnings potential of the business, and differing perceptions of the value of non-tangible assets of the business, such as the exiting owner’s contribution of sweat equity.
So how do you start and manage this seemingly daunting task? Following are some steps you can take to get your company on track for building business value.
1. Get a professional assessment of the current value of your business.
2. Understand the value drivers specific to your business – which may be many, including:
• Revenue and revenue stability
• Historical and projected earnings before interest, taxes, depreciation, and amortization
• Growth potential
• Target markets and customer concentration
• Financial controls
• Competitive landscape
• Personnel stability/turnover and local talent pool
• Legal issues
• Licenses and certifications
• Operations and systems that are in place
3. Identify the tactics that need to be employed to close the gap between current and ending values, the timeline within which this must be accomplished, and what system will be used to monitor progress.
4. Determine what legal and tax strategies should be implemented to make the value building process most efficient.
5. Understand your current cash flow and forecast what your business is likely to generate in the future. Tracking and demonstrating how money performs in your business provides potential buyers with indicators of whether the business will be a sound investment.
It’s never too early to start value-driven management practices within your company. If you’re within five years or less of exiting your business you’ve got some catching up to do. If you’re more than five years out, a focus on building value now can not only improve the odds that your eventual exit from your business will be on your terms, but it will increase the strength and stability of your business today. Seek the advice of a professional exit planning advisor to streamline the process – it’s a complex and long-term one that’s tough for business owners to tackle alone, on top of the responsibility of running their company. For more information visit https://rjzinc.com/.