Do You Know How You Will Exit Your Business?
In the first article in this series, I shared the background for the need to prepare your business for exit and how the 21 Steps were developed to provide business owners a framework to create their plan. In this article, I start with the first step in the process.
But first, I think it’s worth clarifying the difference between succession and exit for the business owners. The definitions that we use are:
- Succession as the transition from working ‘in’ your business to a role where you are only working ‘on’ your business
- Exit is when you leave the business or transition away from your equity ownership.
We start the process by clarifying the outcomes that you are looking for. What is your timeframe and what do you want to be doing after the plan has been implemented?
The first response is typically something along the lines of, “I want to be drinking pina coladas on the beach”. This is a great vision, but it is not enough for most people as they will soon get bored as they are energised by being highly active. How will you fill all of the newfound time that you now have available in a way that will excite and fulfil you?
We are more likely to move towards something when we know the end point and why we want to get there. If we don’t know the destination, then we will just be going around in circles. It is the desirable end point that provides us with the motivation to want to achieve that as a goal.
This motivation and clarity of end goal is as important for succession and exit planning as it is for any other plan – if not more so. There is no shortage of examples of exit deals failing due to a last-minute change of heart by the owners. The reason for this change is usually left unspoken but can be surmised as loss of identity and uncertainty about their future.
Desired outcomes are always related to owners wanting to get the most from their life’s work and that means different things for different people. For some, this means maximising valuation, while for others, it means leaving a legacy. A common theme to regularly surface is that they want to look after their employees.
One thing all owners have in common is that they all desire to leave on their own terms and not be forced into a convoluted earn out period to realise the full sale price!
Every business owner has a number in mind when it comes to exiting their business. This is the amount that they want to sell their business for. They can arrive at this number in several ways. It can be simply a sense of achievement to sell for a certain number such as £1m, £5m or £10m. Sometimes, the number is what they feel the business owes them or how much they feel that they need to retire. More often than not, the number is not linked to any formal valuation of the business.
It’s important for us to know their number so that we can see how close it is to a realistic market valuation. This gives us an understanding of what the plan needs to contain to close the gap and achieve the desired goal in their desired timeframe.
The next consideration is the risk profile of the owners and how this will influence the decision making required to implement the plan. This information gives an indication to the feasibility of the plan and if any expectations need to be adjusted.
To paraphrase Stephen Covey, for any planning process to be meaningful, we need to begin with the end in mind. The purpose of Step 1 is to clarify the goals and outcomes that the owners have in mind.
Once we know the end point, and we know the starting point, we then have all the information that we need to design the plan to close gap. This leads us to the second step in the 21 Steps process and that is to gather the information that defines the starting point.
We call Step 2 Fact Find and we will explore this in the next article in the series.