The goal of Exit Planning is to let business owners leave their businesses when they want, for the money they need, and to whomever they choose. The actions owners and advisors take to achieve that goal are based on an Exit Planning road map, or what we call an Exit Plan. What does that road map generally look like?
Each individual road map is unique because each business is unique. (If you don’t believe this, try telling a business owner “Your business is like a lot of other businesses” and coming out unscathed.) However, every road map has a common thread that runs through it: making the owner inessential to the business. Owners understand that if the business requires their involvement to maintain its cash flow, few buyers will be interested in the company. To make buyers interested, advisors must help owners understand and install Value Drivers.
What Are Value Drivers?
Value Drivers are aspects of a business that give the business value to a potential buyer whether the owner is present or not. Though there are many different Value Drivers, we’re going to talk about three that are a part of all successful Exit Plans to give you an idea for what an Exit Planning road map looks like.
If a business lacks sufficient value to allow the owner to exit on their terms, Exit Planning Advisors look to the management team to spur growth. If current management doesn’t have that ambition or capability, they need to be replaced. Exit Planning Advisors usually have a recruiter or search firm on their Advisor Team whom they can retain to find outside talent as necessary. That management talent possesses “next-level” experience and proven performance. It can grow the company to the level needed to allow the owner to exit successfully.
A critical aspect of recruiting, motivating, and retaining next-level management is designing an appropriate incentive plan. This is the task of the Advisor Team. It uses the owner’s goals to establish performance standards for next-level management. These performance standards align with the business owner’s specific Exit Goals. If next-level management achieves the set performance standards, then by design, the business will achieve growth at a rate that allows the business owner to leave their business at their chosen time, for the money they want and need, and to whomever they choose. These performance standards become a part of the road map.
If management achieves the performance standards, it usually receives a generous cash (or stock) bonus and a deferred bonus, which vests over a time period that extends a bit beyond the owner’s desired exit date.
Helping owners find, motivate, and keep next-level management is often the most impactful single consequence of Exit Planning.
Operating Systems That Increase Cash Flow Sustainability
A second critical Value Driver professional buyers demand is documented, state-of-the-art, proven operating systems in the business. Next-level management teams typically know what this means. If not, Exit Planning Advisors often have a systems consultant on their Advisor Team to help businesses.
Diverse Customer Base
Diversity within the customer base insulates businesses from the risk of a major customer or two leaving and causing a large dip in revenue. Some of the most successful small and mid-sized businesses thrive because of the relationships their owners build with their clients. Unfortunately, most buyers will look at relationships based on the owner personally as a risk they aren’t willing to confront. They ask, “Will these clients stay if we buy the business?” If the customer base isn’t diverse (i.e., if any one customer accounts for more than 5–10% of total sales), that risk multiplies.
Once again, next-level management often mitigates this issue. They know how to find and enter new markets. Combined with documented operating processes, they know how to highlight competitive advantages to draw more diverse customers.
- Exit Planning road maps are unique among business owners, but a common thread among them is installing Value Drivers.
- Finding and retaining next-level management is the most important Value Driver. This management develops and enhances all other Value Drivers.
- One result of developing strong Value Drivers is providing owners with the freedom to choose how they wish to contribute to the business.