Exit Planning is Just a Good Business Strategy

Goal

Why Exit Planning?

In the forward to John Warrillow’s book, Built to Sell: Creating A Business That Can Thrive Without You, Bo Burlingham discusses John’s approach to having an “options strategy” instead of having an “exit strategy.”  The idea is to have as many choices in the future as possible.  “When you follow an options strategy”, John says, “you build systems and a management team around you so that if a buyer comes along, or you decide it’s the right time to get out, you have a sellable business.” In short, exit planning is just a good business strategy.

Exit Planning Helps You Avoid the “5Ds”

According to the 2023 National State of Owner Readiness Report published by the Exit Planning Institute®, 73% of privately held companies in the U.S. will transition within the next 10 years, creating a $14 trillion transfer of wealth.  Also, sadly noted, 50% of all exits are forced–that is, they do not occur on the owner’s terms or timeline.  These exits are the result of what is referred to as the “5Ds”: death, disability, distress, disagreement and divorce.

The Report suggests the following considerations and actions for business owners:

• Determine the current value of your company.
• Educate yourself in value acceleration.  What are the drivers that will lead to a higher valuation?
• Concentrate value AND income generation.  Just because the business generates good income does not mean the company has a high valuation.
• Identifying personal purpose, vision and goals is essential for success in the next phase of the business owner’s life.  According to PwC research, 75% of business owners profoundly regretted selling their company just one year after selling it.
• Establish a team.  It takes a team to create value for a business.

The Language of Exit Planning 

• The goal of Exit Planning is to maximize the value of the business at the time of the exit, minimize taxes, and ensure the owner can accomplish all his or her personal and financial goals in the process. 

• Succession Planning is the process of identifying and developing individuals within an organization to take on key leadership positions when current leaders leave or retire.

• Transition Planning refers to the process of preparing for a major change in operations, such as a merger, acquisition or leadership change.

• Exit planning identifies the Wealth Gap (required income producing assets – existing income producing assets), the Profit Gap (best-in-class EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization] – actual EBITDA), and the Value Gap [(best-in-class multiple x best-in-class EBITDA) – existing business value].

• Human Capital is a measure of the talent of your team.  If you have strong talent, someone will place a high value on that.  Moreover, if you have strong, developed talent, your business likely does not depend on you to be successful.

• Customer Capital is the strength of your relationship with customers. Are those relationships deep, long-term and contractual?  Recurring revenue is highly regarded.  Most of all, are those relationships transferable?

• Structural Capital is the business’s infrastructure.  It comprises the systems and tools that augment the customer and human capital on which your company is built.  It takes what exists inside your brain and turns it into a transferable form.  These are best practices that can be purchased and repurposed.

• Social Capital is your culture, your brand, the way your team works, the rhythm of the day-to-day operations and communications, and the way you communicate with customers.

 The Michigan Small Business Development Center has Certified Exit Planning Advisors (CEPA®) who provide confidential, no-cost, conflict-free exit planning services for Michigan businesses. To learn more, register for consulting services here.

Brooks Kindel
Business Growth Consultant
Michigan SBDC Growth Team

Brooks Kindel began his career as a banker and has held a variety of corporate finance positions including CFO and General Manager of several manufacturing operations. He has significant experience in over a dozen industries as well as business turnarounds, and mergers & acquisitions.

Brooks serves as Team Leader for the SBDC Exit Planning/Buy-Sell programs and assists clients with financial management, exit planning, operations, and accessing capital. In addition to having developed the curriculum for the Michigan SBDC Academy of Small Business Advisors, he gives presentations on “The Five C’s of Crisis Management: Turnarounds”, “Exit Planning”, “How to Buy or Sell a Business”, “Know Your Numbers” and “How to Form an Advisory Board.”

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