Exit Planning Helps Build Business Value

Submitted by John Brown on Tue, 11/21/2017 - 4:00pm
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In this series of posts, we’re discussing the creative, but all-too-common, objections business owners make regarding Exit Planning.

A third common objection speaks to a problem many owners face: “There’s no reason to plan an exit until my business is worth enough to leave.”

Many advisors do not specialize in increasing business cash flow and value, which causes them to respond, “I’m not equipped to help you build value,” and move on to other prospects. It’s likely that most business owners would agree with their advisors: They don’t believe that attorneys, CPAs, financial planners, or most other professionals can help them grow value. But all Exit Planners run into the issue of value. In fact, inadequate business value is the primary issue Exit Planners will have to tackle. Since many Exit Planners come from backgrounds that don’t explicitly deal with increasing value, how do they address this issue?

Exit Planners appreciate the need to upend most owners’ understanding of the relationship between Exit Planning and growing value. Business owners think they need to grow their companies before talking to anyone about Exit Planning. However, Exit Planning is central to creating a company that has sufficient cash flow and the right kind of value—transferable value—to support an owner’s successful exit. That means that the converse is true: Business owners can (and should) take up Exit Planning to grow their companies and thus do not need to wait.

It’s All About Business Value

Business value, or lack thereof, was a consistent theme for the respondents to The BEI 2016 Business Owner Survey. We asked owners to complete the sentence, “I believe that the greatest obstacles to my successful future exit from my business are. . . .” The responses were:

  • 27% – Business value is not sufficient to provide me with financial security.
  • 15% – I need to stay in my business until I have enough money saved to retire.
  • 13% – My business is not profitable enough to be desirable to any buyer.
  • 12% – I can’t leave. My business isn’t worth enough.
  • 10% – No buyer will want to buy my business.
  • 7% – My business is fragile at this time.

To probe the respondents’ willingness to exit, we then asked, If a buyer offers you enough cash for your business to provide you with complete financial security, would you sell today?” Seventy-five percent answered “Yes.”

How then can business owners move forward with Exit Planning now, before the business is ready to exit?

Know Thy Self, Know Thy Enemy (Sun Tzu)

In this battle to increase value, we’ve established that most advisors are likely not experts in the field. Now, let’s look at what they’re up against:

  • Business owners don’t think Exit Planning should begin until their businesses have sufficient value.
  • Business owners don’t know how to grow business value. If they did, they would be doing it.
  • Business owners don’t think an Exit Planner can help them grow value, since most Exit Planners come from a profession not associated with helping owners grow value. They are probably correct.

It’s clear that business owners need help, but how can Exit Planners help them?

Know the Relationship Between Exit Planning and Value Creation

BEI Members lead with their Exit Planning knowledge and experience. They show business owners how they can help, as Exit Planners (not just as attorneys, CPAs, financial planners, etc.), develop and implement plans to grow businesses to the level owners need to bridge the financial and value gap between where they are today and where they must be to exit.

Creating and increasing transferable value starts with creating, motivating, and retaining great managers. Having seasoned, best-in-class management is indispensable to any company’s long-term growth for one simple reason: Management is responsible for the creation, direction, and rate of growth of all other Value Drivers. More effectively than any other Value Driver, best-in-class management creates transferable value—the ability of a business to continue without the owner with minimal disruption to its cash flow.

How Do Exit Planners Explain This Relationship?

Step 1: Exit Planners don’t need to be experts in building value, but they do need to understand the role value plays in every business owner’s successful exit. Unless they are experts in increasing business value, few of BEI’s Exit Planners roll up their sleeves and dive into their clients’ businesses to help them grow value. Fortunately, they don’t have to know how to help grow business value in every situation. Instead, they need to know the following:

  • What needs to be done.
  • Which advisor (or advisors) to retain to help owners grow business value.
  • How to coordinate all the players to accomplish a business owner’s goals.
  • How their profession plays a role in growing value.

Step 2: Exit Planners help business owners explore commonly used tools and designs used to attract, retain, and incentivize key employees to grow business value and cash flow (e.g., non-qualified deferred compensation plans, phantom stock plans, stock bonus plans).

Step 3: Exit Planners review tools they might use to protect a business from harm should an employee leave (e.g., non-solicitation agreements, covenants not to compete, employment agreements).

Step 4: Exit Planners explain their involvement as the “field general” of the business owner’s campaign to grow value. BEI Members tell owners they have a solid understanding of the importance of a management team in value building, what needs to be done, and by whom. They are not value-building experts, but they do have extensive training in Exit Planning and the support of BEI’s Exit Planning project management software, EPIC. They have access to a network of other advisors, and a host of tools and planning ideas designed to motivate, incentivize, and retain excellent management teams.

This post concludes our discussion of the three most common reasons owners cite for delaying Exit Planning to another day. We encourage you to call us at 303-321-2242 or email us directly for more information about how you can begin Exit Planning, whether you’re an advisor or a business owner.



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