In the last few posts, we’ve been discussing how Exit Planning Advisors work to build transferable value—the value a business has without its owner at the helm—in their clients’ companies. For some owners, building value is a project that they undertake when they find out that their companies aren’t valuable enough to produce the post-exit financial security they need and desire. For others, they realize that unless they grow, competitors will continue to pick off the best customers and prospective employees.
We’ve argued that the fundamental building block of growth, in both business cash flow and transferable value, is a next-level management team capable of running a company successfully with minimal—or ideally, no—owner involvement. For that to happen, owners must change their roles from hub to spoke, and management teams must be motivated to achieve the growth that owners require to exit their companies on their terms. It is the management team that executes the tasks that build value.
We organize tasks that management teams must execute by their characteristics: characteristics that professional buyers (e.g., private equity firms) consider to be essential in the companies they acquire. These characteristics, which we call Value Drivers, reduce a buyer’s risks related to ownership and increase the likelihood that a company will continue to grow under new ownership.
The Most Important Value Drivers
To reiterate, Value Drivers are characteristics that professional buyers—such as private equity firms—seek in business acquisitions. The most important Value Driver is a next-level management team. There are seven other Value Drivers that owners, their next-level management teams, and their advisors should install:
- Stable and improving cash flow
- Operating systems that generate recurring revenue and increase the sustainability of cash flows
- An established and diverse customer base
- A realistic growth strategy
- Financial foresight and effective financial controls
- Demonstrated scalability
- Competitive advantage
How Value Drivers Build Value
Effective value building doesn’t just happen. It requires a planning and execution process that coordinates and prioritizes tasks, assigns specific responsibilities to specific people (e.g., owner, key employees, or advisors), and sets deadlines.
Once owners understand that Value Drivers make their businesses as valuable as they must be to support their post-exit financial security goals, they want to know how they can install them. Exit Planning Advisors who use The BEI Seven Step Exit Planning Process, along with BEI’s planning tools, take a four-step tack to help owners install Value Drivers.
- They first begin by establishing the owner’s goals.
- Next, they perform a Gap Analysis, in which they assess an owner’s existing financial resources and calculate how much they’ll need to reach their financial goals.
- Then, with the input of the owner and the Advisor Team, Exit Planning Advisors begin the planning process of transitioning business growth responsibilities from the owner to next-level management, which builds transferable value.
- Finally, they tweak elements of the plan to assure that the business grows at the pace necessary to achieve the owner’s goals.
How on Earth Do Exit Planning Advisors Know How to Do All This?
Those four steps might sound overwhelming. While it can be challenging to do all those things, it’s important to remember something: Advisors skilled in Exit Planning aren’t experts in every part of growing value. They are, however, experts in seeing the big picture (i.e., the owner’s goals), knowing how to articulate that picture in terms owners understand and care about, and creating the plan necessary to achieve those goals.
Exit Planning Advisors understand several things:
- What the owner’s role in the business must be if it is to have transferable value.
- How critical management teams are to their clients’ successful exits.
- How to create plans designed to motivate management to increase business growth.
- How to involve other professional advisors in:
- Assessing the strength of existing management teams and all other Value Drivers.
- Identifying areas of weakness.
- Recommending actions to improve those weaknesses.
Crucially, Exit Planning Advisors understand that by helping owners strengthen their companies’ Value Drivers, they will likely see an increase in significant work and involvement with successful owners for a long time.
In short, it is the responsibility of the next-level management team and the owner’s advisors to grow business value to the point where the owner’s financial security is assured after they exit. Based on the owner’s exit goals, they build value by installing Value Drivers. Installing Value Drivers works toward helping owners achieve their goals.
Typically, none of this happens unless advisors make owners aware of what they must do to exit on their terms. Exit Planning Advisors play a huge role in the success owners experience after they exit their businesses. But with that responsibility comes great opportunity.
- Few businesses are growing at the rate necessary to support their owners’ post-exit financial security goals.
- Without the active intervention of advisors, few owners will understand how much value they need to build, much less how to do so or how much time it will take.
- Growing a business involves knowing what to do; a coordinated effort from owners, their management teams, advisors, and all employees; and a plan that assigns responsibility for completing tasks and meeting deadlines.
- Building business value involves several advisors, all of whom are led by the Exit Planning Advisor.
- BEI’s Exit Planning Process is the most efficient and cost-effective road map to helping owners build value for what is likely the most important financial transaction of their lives: the sale or transfer of their companies.