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Bridging the Asset Gap to Assure Exit Planning Success

Submitted by John Brown on Sun, 06/25/2017 - 6:00pm
Growing Business Value

Throughout this series, we’ve highlighted the advantages of The BEI Seven Step Exit Planning Process™ for owners and their advisors. We’ve discussed the importance of setting goals and why determining the Asset Gap is critical to a successful business exit. Today, we describe the benefits of completing Step Three of the Process, growing business value and cash flow, for owners and their advisors.

Growing Value: Benefits for Business Owners

When arriving at Step Three of the Exit Planning Process, the business owner and his or her advisors have already determined four key facts:

  1. How much cash the owner will need to live the post-exit life he or she desires.
  2. How much of that cash must come from the sale or transfer of the business.
  3. How much the owner’s business and non-business assets are worth today.
  4. The size of the owner’s Asset Gap.

Step Three concerns growing business value and cash flow to close the Asset Gap. For business owners, the benefit of growing business value and cash flow is simple yet refined: It allows owners to exit when they want and for the money they need. A successful exit relies on consistently growing business value and cash flow, since that’s what new owners—whether they’re third-party buyers, family members, or employees—want and need to continue the business’ success.

Unfortunately, most owners fail to grow business value and cash flow at the rate necessary to leave their businesses when they want and with the money they need. The problem usually piggybacks on owners’ failures to adequately ascertain their Asset Gaps. Recall that one of the most common mistakes owners make is overvaluing their businesses while underestimating what they need to live a comfortable post-exit life.

Fortunately, Step Three provides the structure, tools, and process to allow business owners to accurately determine how much their businesses need to be worth (and how much cash flow their businesses need) to assure a successful exit. Completing Step Three benefits owners by setting benchmarks for business value and cash flow, giving them the best chance to exit their businesses on their terms.

An Observation

If business owners knew how to increase value and had the capacity to do so, it’s safe to assume that they would be doing so right now. That would be a reasonable assumption even of owners not interested in exiting ever. The fact that business owners are not working to increase value with an eye on their post-exit lives underscores our conviction that most owners simply don’t know how to grow value at the rate they must to exit their companies on their terms.

Growing Value: Benefits for Advisors

The first two Steps of the Exit Planning Process accurately quantify the owner’s resources and the size of the owner’s Asset Gap. Those Steps are essential precursors to designing and implementing value and cash flow growth plans for owners.

Advisors reap several benefits from helping business owners grow their businesses’ value and cash flow:

  • Committing to Step Three opens the door to deeper client engagement. Owners (especially those who plan to exit one day) are usually interested in and open to discussing ways to enhance business value. This Step gives advisors the platform, tools, and process to have that discussion.
  • Committing to Step Three requires collaboration with other advisors, opening the door to new business relationships. Every advisor has something to contribute, even though helping owners grow value is outside the scope of most advisors’ expertise. No single advisor has all of the needed knowledge, skills, or tools to help the owner achieve his or her growth-based goals.
  • Step Three of The BEI Seven Step Exit Planning Process takes the pain of over-expectation off of advisors’ shoulders. Advisors who adhere to The BEI Seven Step Exit Planning Process simply need to contribute their share, rather than having owners (or themselves) expect them to do everything: The CPA provides accounting expertise, the business consultant provides business-consulting expertise, and so on. They use a process involving the owner, the owner’s advisors, and the owner’s management team to create a series of recommended actions based on the owner’s resources and goals. These written recommendations become actions once responsibility is assigned to either the advisor, owner, or management to be completed by a set time. In this sense, the Exit Plan becomes a project management tool, which spreads the burden of responsibility among advisors rather than falling to a sole advisor.

Start the Conversation

For advisors, engaging business owners in an organized process that results in their successful exits begins with goal setting, followed by a resource check. Armed with accurate information, advisors can ask owners questions dealing with growth, such as:

  • Have you considered what you, as the owner, need to do to accelerate growth?
  • Do you believe your management team has the capability or motivation to grow the business at the pace necessary to allow you to exit on your timetable?
  • What are your ideas to grow value or cash flow?
  • What, if anything, does your company lack that prevents you from reaching your value and cash flow targets?
  • Does your business have a written plan to grow revenue, value, or cash flow?

There are many follow-up questions to each of these conversation starters that advisors will need to ask. The goal is to uncover the actions the owner and company are taking to close the value gap.

Don’t Be Afraid to Ask

We find that most advisors don’t ask business owners about growing value because advisors know they don’t have the tools necessary to implement solutions. As this article has explained, no single advisor needs to have all the answers. No single advisor can possibly have all the knowledge and experience that’s required. However, advisors can make order out of chaos by implementing a process that (a) requires coordination of the efforts and knowledge of a team of advisors who, jointly, possess that information—The BEI Seven Step Exit Planning Process—and (b) systematizes Advisor Team recommendations into a time-driven series of actions designed to grow value and cash flow sufficient to achieve all of the owner’s goals and aspirations.

In our next article, we will continue with Step Three by discussing the factor that drives value in entrepreneurial businesses, Value Drivers, and how you can help business owners identify those Value Drivers.

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