Exit Planning 101

As a business owner, you have worked hard to build up your company over the years.

Five Items to Consider for a Successful Business Exit

1. The Timing of a Successful Exit Plan

Capital Concepts Breakdown: To correctly plan your transition out of your company, you need anywhere from 7-10 years to get the maximum value from your business and exit on your terms. This time frame accounts for every step along the way that is necessary to prepare yourself and your company for your successful exit, not just the time it takes to place the company on the market and sell.

Selling or otherwise exiting a business is not as simple as just selling the shares of a company. Your business is an illiquid asset and it will take time, usually anywhere from 7-10 years, to get the company ready for your successful transition where you achieve your exit goals (maximum value, preserve legacy, etc.)

We don’t present this timeline as a scare tactic or for shock value – it’s said to emphasize the fact that the exit process needs to begin sooner than you would think, even if you aren’t ready to transition out any time soon. If you begin immediately, by the time you are ready to think about exiting, you won’t have to start at square one.

2. Increasing the Valuation of your Business

Capital Concepts Breakdown: To receive the maximum value for your business, you need to shift your perspective from minimizing your taxes to maximizing your EBITDA.

During your time as a business owner, your objective may have been to minimize the amount of taxes your company is subjected to.

During an exit process, this can actually work against you; by minimizing your taxes, you are also most likely depressing the perceived value of your business. This will impact the valuation of your company when it comes time to sell or exit via another method.

When you are preparing your exit plan, you need to switch your perspective from paying the minimal amount of taxes to instead maximizing your EBITDA to be able to receive a higher valuation for your business.

3. Increasing Recurring Revenue Opportunities

Capital Concepts Breakdown: Having a higher percentage of recurring revenue opportunities versus project-based revenue will play a role in increasing the valuation of your company.

As part of your preparation for a transition away from your company, it is important to review and develop a strategy for ways to shift project-based revenue to recurring revenue, as well as implement a process to accurately track your customer acquisition costs.

The recurring revenue is seen as more desirable due to its predictability and lower customer acquisition costs, provided your company is accurately tracking this.

Customer concentrations should be reviewed as well – even if the revenue is recurring, it is not considered stable if 50% of it is coming from one client. Adding diversity and volume to your customer base creates a more stable business, which will ultimately result in a higher valuation.

4. Minimizing Owner Dependence

Capital Concepts Breakdown: When you are looking to transition away from your company, you will need to recognize that this will be impossible if the business is centered and dependent on you.

As the business owner, you are most likely a large part of your business. However, If you are essential to the company and do not have strong management or leadership present in the business, then your company’s valuation would be zero.

To solve this issue, you as the owner would need to spend time ensuring you have a competent management team who can operate the business without you. You also will need to spend time developing and and improving business processes so that no singular task needs to be completed by a specific person like the owner – the process is documented and in place so that anyone in that role can complete their specific tasks.

This removes owner dependence, allowing you to step away from the company without impacting day to day operations, which ultimately will increase the valuation of your business.

5. Managing Your Valuation Multiple

Capital Concepts Breakdown: Your valuation multiple is based on many different factors, including your EBITDA, portfolio optimization, owner dependence, personal expenses that are tied up in the business, how the company is run, etc. and will not be the same across any type of company or industry.

Your valuation multiple plays a key role in determining your company’s worth. Your multiple is specific to your business, so there will most likely not be one distinct valuation across any type of company or industry. Valuation multiples are also not fixed – just because a similar business received one multiple does not mean that your company will receive that same multiple.

We like to use the example of selling a home. If two houses are for sale and they are the same model in the same neighborhood, which house will sell for a higher price – the house with nice landscaping, upgraded kitchens and baths, and an extra bedroom or the house that does not have those features?

The same concept applies to your business – the best way to manage your valuation multiple is to ensure you spend time “upgrading” your business through all the factors we discussed above.