All business owners know they will eventually exit their business, and most understand that making it happen on their terms is a process that typically takes years. Yet, as is the case with any complex project, sometimes the hardest thing to do is start. Yet, starting is as simple as choosing your exit date! I always suggest to business owners that they write their exit date on a sticky note and place it on the light switch near their office door so they see it when they turn out the lights every day. Once you’ve actually chosen that date, what’s next?
Lay a foundation by documenting your basic company information all in one place.
- Years in business
- Type of entity – how is it taxed?
- Owners: names/% ownership/ages
- Company Information for the last four years:
- Annual sales
- Key Employees
- Projected exit date
Now, turn your attention to your company’s value and value drivers.
Knowing your company’s current value and what it must be worth when you exit will identify the gap between the two values. That gap amount will be the basis for your entire exit strategy for reaching that ultimate value goal – the amount you need to live the next chapter of your life as you envision it.
Your plan will involve your company’s value drivers, which are business systems that either generate recurring revenue or financial efficiencies from an established/growing customer base. Maximizing the performance of your business in these key areas will ensure the sustainability and growth of your business, which will help you get top dollar if you eventually sell to a third party or will enable you to turn over a financially strong entity should you transfer the business to key employees or family members.
The top ten business value drivers are:
1. Stable, motivated management and a high-performing workforce
2. Systems that sustain the growth of the business
3. An established, diverse, customer base
4. A facility that is consistent with the asking price in terms of its appearance, condition, technology, equipment, and organization
5. A realistic growth strategy
6. Effective and documented financial controls
7. A good business overview in terms of audits, bank relationships, etc.
8. A solid financial structure in terms of growth, cash flow, profitability, revenue, and debt
9. Positive standing within the industry and diversity of industry sectors served
10. Protected technology and intellectual property
You’ll need to identify your own company’s value drivers and ask some questions.
- Which ones are working and why?
- Which ones are not working and why not?
- What needs to be done to get those working?
Develop an action plan to improve those that need attention and determine which value drivers are priority and should be focused on first.
Consider a Quality of Earnings Assessment
A Quality of Earnings Assessment is one of the major steps in due diligence that a prospective buyer will perform to determine the quality of assets and identify any financial shortcomings of the private target company. The resulting Quality of Earnings Report (QER) will demonstrate, among other things, how the company accumulates its revenues (i.e. cash and non-cash, recurring or non-recurring). There are many key details that are not outlined in the company’s income statements, so a breakdown of cash sources is of major importance. More specifically, if the target company reports a positive net income but poor-quality earnings, the buyer may be looking at an investment with higher risk than the profit and loss statement might indicate. To avoid unpleasant surprises when buyers get serious, it is well worth the time and expense to obtain your own QER ahead of time.
Buyers are interested in:
- Minimized risk
- Predictability increasing cashflow
- Cashflow that can cover:
- Current operating expenses
- The new owner’s salary requirements
- Financing costs
- Annual ROI on invested capital
- Realistic growth strategy
- No surprises!
Do some easy homework to know where you stand.
- Complete our online Value Driver Analysis: https://rjzinc.com/value-driver-analysis/
- Complete our online Exit Planning Assessment to gauge your readiness to exit: https://rjzinc.com/exit-planning-assessment/
- Compile a list of the KPIs you measure
Meet with me for an hour – in person or via Zoom or Skype – for a complimentary review of your online assessments, your ability to exit according to your goals, and to discuss what would be involved in putting an exit plan together. Or contact me to request segments of a recent presentation I gave that will provide you with much more detail about value drivers and the Quality of Earnings Report. Take that first easy step and start creating your future today!