Posts tagged with: exit planning
Listen to Kevin Manley on Exit This Way™
Kevin Manley, Managing Partner at The Exit Advisors and Manley Strategic in Daytona Beach, FL. returned to join host Kerri Salls on Exit This Way™ for part 2 of Entrepreneur to Exit Planner, It’s All About Value.
Kevin Manley, founder of The Exit Advisors and Manley Strategic, is a noted business & exit strategist and entrepreneur. Kevin holds an MBA, a Masters in Engineering, and a CExP. He has founded, advised, and/or invested in a variety of companies in consumer electronics, medical technology, philanthropic technology, real estate development, etc. In 1995 Kevin co-founded Yesmail.com, an online e-marketing solutions company. He and his co-founders took Yesmail public in 1999, and sold it to CMGI in 2000 for over $700M. This 5-year process involved name changes, strategic focus changes, smart advisors, luck, great timing, and great people.
Kevin helps owners of both startups and established businesses maximize their company’s value and formulate a plan to grow their business, leverage their talent, improve their focus, utilize technology, enhance overall stability, and develop and implement an exit/transition strategy.
Entrepreneur to Exit Planner, It’s All About Value
Kevin was an entrepreneur in the heyday of technology, and now is an exit planner working with owners to create value in terms of positioning for an exit.
What makes your perspective unique as an Exit Planner/Exit Strategist?
Kevin says exit planning is just a different mindset thinking about your business to get to the exit, and that’s the hard part of being an exit planner. In a startup, if you’re raising money, you have to think about the exit upfront, build in to your business plan. So, Kevin talks to owners about their business entrepreneurially, to show them what it looks like from another party’s perspective.
Building value – what does that mean to you and what does that mean for clients?
Kevin gets owners started on the process of rethinking the business operating without them. His simple examples included: recurring revenue, stability and predictability of cash flow, risk. In terms of risk he pointed out lack of customer diversity, of being hit by a bus, not having passwords written down somewhere to address business continuity concerns.
Kevin will lead the discussion with an owner starting with value and increasing that value to make their business more valuable to a third party.
Kevin gave some easy practical steps to put in place for basic continuity planning such as succession planning with basic instructions to successor/spouse in case of an owner’s death. He recommended that ideally an exit planner should be brought in as soon as that succession plan, 8-10 years out, is just a glimmer because it can take that long to groom and transition to successors.
Universal Exit Objectives
Kevin shared what he called the Universal Exit Objectives
- When do you want to leave?
- How much do you need?
- Who do you want to succeed you?
He said that if an owner writes down the answer to any one of these three questions, they join the 8% of all owners who have written anything down. And only 12% of owners have had a discussion about their exit with their professional advisors.
In the decision to reduce risk, he recommends that owners want the option to transfer ownership to their children, to insiders or to a third party. Transfer to a third party is always an option in an effective exit plan. When owners assume liquidation is their exit plan and they intend to ride it out until they can’t, he tells them, that essentially they have not plan.
Every business needs an exit plan. Why?
Exit planning is a valuable and necessary service to give owners more options. Kevin has asked owners who have successfully exited their businesses: what was the trigger to start planning? What did it take to be ready to speak with an exit planner?
The answer was they had to get to a point of thinking about: ‘What’s next for me? What’s next for my life, outside the business?’ If owners can’t see that, there’s no reason to make any changes. He’s found that scare tactics from the outside, and he mentioned a few, don’t work.
Kevin educates owners that an exit planner is owner-centric, focused on what the owner wants to have happen as an owner of that business, whereas some of your other advisors; your accountant or attorney for example, may be more reactive to what is happening in the business.
He says that for smaller companies, early exit planning can make manageable changes result in a huge difference for the owner.
Kevin has seen that if owners have thought about an exit, it’s usually just down one path, as if it’s their only path. Put an exit planner in the mix and you can identify several paths to consider. Owners don’t usually take time to consider an alternate path, or as Kevin did at Yesmail, change their business model.
He suggested ways to create recurring revenues or productize what you have. You could end up getting acquired for that one product.
Kevin suggests that an exit planner comes in to a company to have those conversations, to explore options, because they always have their eye on the exit. ‘We talk about the business today but talking about value and sellability with an eye on the exit.’
In contrast, he made the distinction that a business coach or turnaround coach is worried about keeping you in business, helping with your executive team and leadership issues. Whereas, as an exit planner, Kevin will keep an eye on those things too, but always with a focus on how you the owner will exit the business.
Kevin went on to offer tips on personal income tax planning to consider before and after an exit and full circle back to value and the importance of getting a third party business valuation.
Listen to Kevin’s full interview here.
Most business owners assume that selling their business is a sprint to the finish-line, but the reality is it is more like a marathon. Whether you are prepared for it or believe it or not; it takes a long time to sell a business – if you want to command full value.
The sound of the starter gun sends adrenaline flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how most people think of starting and selling a business: as something akin to a 4 x 4 100 meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. When they hand over the check and you’ll ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp and many others – right?
Unfortunately, the process of selling your business looks more like a grueling 100-mile ultra-marathon than a 100-meter sprint. It takes years, a lot of planning and a lot of preparation to ensure you can make a clean break from your company – which means it pays to start planning sooner rather than later. Here’s how to backdate your successful transaction and transition to a reinvention to get started.
Step 1: Pick your sell-by date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.
Whatever your goal, the first step is writing down when you want out, identifying why that date is important to you, as well as what you will do after you sell, with whom, and why.
Step 2: Estimate the length of your earn out
When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future — if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.
Earn outs these days average two – three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: + 1-5 years
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you are in a position to give them three years of operating results during which you didn’t make any major changes to your business model, financial structure or ownership.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes. These could include such things as: a new accounting software package; a clean financials; or changes in cashflow, risk tolerance, operational quality, pricing, cost structure, market channels, etc.
Estimate: + 3 years (after changes implemented)
Figuring out when to sell
The final step is to figure out when you need to start the process. Let’s say:
- You want to be in Tuscany by age 50, your sell-by date.
- You budget for a three-year earn out, which means you need to close the deal by age 47.
- Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary and commit to the sale process by age 46.
- If you’re still tweaking your business model – e.g., experimenting with different target markets, channels and models; you will need to lock in on one strategy by age 43 so that an acquirer can see three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year trek to reduce risk and maximize value. The sooner you start, the better.
So if you wanted to command full value and be out by age 50, and you’re 45 or 47 now, you may have to delay that sell-by date or tie down operations right now, and get started planning earlier rather than later.
David Kong in his Fortune.com commentary: Best Western CEO: Why you should never get promoted too quickly, stated:
“When we’re young, especially in our 20s, no one is thinking about retirement. But everyone’s career comes to an end, at some point. So it’s never too early to start focusing on your legacy. We should think about how we want to be remembered not just in our company, or our industry, but in our family and amongst our friends.”
It can take a lifetime to build a legacy or it can be galvanized overnight. The challenge is to consciously choose what you want to be remembered for. If we abdicate this opportunity, others will decide what our legacy will be or if it (meaning us) is even remembered.
If you value how you will be remembered, what do you want it to be?
There are two sides to legacy
On the qualitative side, your legacy preserves what you stand for personally and in your business:
The challenge is that most business owners are so busy operating their business that these larger parameters which have long term impact get sidelined or neglected.
On the fiscal quantitative side, your legacy will depend on a number of extremely personal decisions:
• How much money do you need for personal financial freedom?
• What lifestyle are you planning for beyond the business?
• How much money do you want to be able to pass on to family to secure their future for generations?
• What philanthropic commitments do you aspire to make in your lifetime or as bequests?
Your answers to these questions depend on many factors. In some ways the financial decisions are easier than the qualitative ones!
Starting now, take time to reflect:
• Are you having a positive and lasting impact on your team or customers?
• Do your actions inspire the people around you?
• Have you made a transformational impact on the company you built? On your industry? Or the people you care the most about?
• How do you want them to value that experience?
In building your legacy and providing security for your dynasty, it’s imperative that your plans ensure you do not outlive your money. You do not want your legacy clouded or tarnished by inadequate planning for your own lifetime.
Your business and personal legacy plans take time to define, test and execute. It does not come together overnight, or in the midst of the intense transaction process. Rather, it takes contemplation and preparation over the years leading up to that transaction and transition.
The planning for your reinvention, legacy and dynasty should be established before you let go/cash out of your business. To focus on your legacy, integrate your reinvention planning with your exit planning to achieve your ideal qualitative and quantitative outcome.
Your legacy is about your journeys, your values and the truly lasting and positive impact you make. What will yours be?
Most business owners have not put a lot of thought into planning for their eventual exit from their business. Many many owners, of established as well as startup companies, don’t see any value in planning for an exit that is years if not decades into the future. If they can’t see immediate benefits and consequences for their actions and decisions, they leave it for ‘someday’.
You may not need an exit strategy if you intend to die at your desk and leave a mess for your family and team to clean up.
So let’s suppose. Do the following points describe you?
You Don’t Need an Exit Strategy IF You:
- Want to liquidate your business upon closing even if it means getting only pennies on the dollar
- Want to maximize your tax bill to the state and Uncle Sam, minimizing the return to your family
- Do get to sell in the end (maybe a firesale) and you enjoy paying your technical/transaction advisors at their highest premium fees
- Are willing to walk away from 30-50% of the value of your business
- Are willing to let the business lose clients when you depart
- Don’t feel responsible for your employees after you’re gone. Will they still have a job, will they move, will they have to take a pay cut?
- You and your business are not a community partner, in donations, sponsorships or time, and your closing will not hurt the community
You Don’t Need an Exit Strategy IF Your Family, Your Spouse, or Your Children:
- Can and will jump in and run the business your way, without any need for some development and succession planning in advance
- Can salvage or sell the business on their own while you are indisposed
- Do not need or expect the business to be liquidated in some way to secure their future
- Do not expect or deserve a return for all the sacrifices they made for you to build that business
These statements are a bit exaggerated. ‘Yes, But my situation is different…’ is not enough. Without a Framework for your exit; you, the business, your team, your family, your finances and your future will all be shortchanged. Is that your intention? Is that your plan?
- Everyone needs a Master Plan – for their business and their life
- Every owner needs contingency planning – ideally before you opened the doors to your business – sooner rather than too late
- Every owner needs to start exit planning early – years earlier than any transaction advisor every required of you
- Exit planning and execution take time and a team to maximize your return and optimize your exit transition
If not now, when?
Call us for your free consultation.
Exit Risks Owners Are Accepting by Default
Exit planning is one of the most critical components of owning a business, especially for owners of private and family owned businesses. Too often, small and medium size business owners have the majority of their wealth tied up in the business. If their reinvention plans beyond the business and their lifestyle moving forward depend on harvesting that wealth when they exit their business, they need a well-thought out exit strategy that addresses exit risks for the owner, the business, their team, their family and their finances. And they need to build and execute on that plan starting years before they cash out.
Most entrepreneurs are consumed with the day-to-day activities of running and growing their business (es). Making time for the strategic side, and delegating operational responsibility has not been prioritized. This lack of long-term planning has many unfortunate consequences that owners are therefore accepting by default.
As advisors, we refer to many numbers when describing the exit risks that owners of private and family owned businesses face when they decide to monetize the business they built. A few of these ominous numbers which owners are indeed accepting by default are listed below:
- 90% of all private businesses do not have an exit plan.
- 75 – 90% of an owner’s wealth is tied up in their business
- Owners leave up to 50% of the value of their business on the table when they cash out.
- Owners don’t know how much value they give away until 2-3 years after the transaction.
- Only 13% of all possible business exit transactions are completed. 87% fail.
- Of that 13%, three quarters fail in the execution, integration and follow-through.
- Only 3% of sales of small and medium size businesses succeed.
- It takes 3-5 years to prepare a business, maximize valuation, and demonstrate that value before entering into a transaction
- It takes at least 6-9 months to complete the transaction process with many possible delays, detours and caveats. And if the business, team, personal and financial planning is not already complete, the transaction process can be put at risk.
- Owners who start exit planning, transition planning and reinvention planning in parallel can minimize (~1%) or eliminate the tax bite on any transaction.
The current seller’s market window is closing. Do you have time to maximize and demonstrate your peak value and cash out by 2018?
If the default option doesn’t fit your goals and dreams, email or call us to explore all your exit strategy options and reduce these risks for you.
Traditionally viewed as three distinct practices Exit Planning, Value Creation Consulting and Investment Banking, the emerging Power Practice of tomorrow embraces the paradigm shift of a truly integrated approach to helping sellers extract maximum value from the sale of their company as well as allows Intermediaries a deeper more longitudinal relationship and greater fee participation and deal flow over time.
I was seated on the panel discussion on this topic at the AMAA conference in Chicago on July 24, 2014 addressing an audience M&A advisors.
The Moderator was Craig Dickens – CEO, Merit Harbor Group
The Panelists were:
Peter Christman – CEO, The Christman Group
KevinHanson – CEO, The Ashton Group
Kerri Salls – Managing Director, This Way Out Group LLC
Kathleen Richardson-Mauro – Co-founder, Richardson-Mauro & Johnson
- Plan – The need for a plan
Preparing the seller
Get over resistance – why entrepreneurs don’t plan –
Tangible results of a plan on deal completion
- Un-siloing silos – the need for an integrated deal team.
Where collaboration leads to better results
Setting ego aside
Who is the quarterback.
- Tools of collaboration
Data share – exit plan yield % done deals etc.
Integrated deal team = better results etc.
- The Emerging Power Practice
Identifying true targets. Create your own deal flow
Tatum Thesis example
Giving the seller a plan or empowering the seller.
Marshaling the difference between advisory and sell-side activities
The hand-off from plan to value creation to execution and seller readiness
Cash Flow implications to a Power Practice.
The consensus on the panel was that owners need a team to get to the deal and to complete the deal. And they need exit planning and value creation expert guidance much earlier than they need transaction guidance. With a power practice team on board, the client benefits from advisors being fully up to speed and engaged on their issues, their goals, their criteria long before the intense transaction cycle begins. Both the client and the advisors benefit from an integrated team collaborating for better client results. That’s the emerging power practice.
Exit Strategy Pioneer Offers Alternative to Help the 90% of All Business Owners who Close Down With Nothing.
Serial entrepreneur and exit strategist Kerri Salls releases Selling Your Business for Maximum Profit to prepare the 8M baby boomer business owners who want to cash out by 2018.
Boston, Massachusetts (PRWEB) 21, May 2014
This Way Out Group LLC, the elite provider of early exit strategy services in the lower middle market, announces that Managing Director Kerri Salls, the pioneering exit strategy leader behind the groundbreaking 4 Step Exit Strategy Framework™ has released her complete system, Selling Your Business for Maximum Profit. This program will ensure that owners of private and family owned businesses can avoid being part of that 90% failure statistic, when implemented years before they intend to harvest the wealth in their business.
Selling Your Business for Maximum Profit is for all business owners who think they want to sell their business in the next 2-7 years. If they are counting on making the most money possible when they sell their business, they can’t afford to wait, postpone, deny or ignore these essential steps in the process to avoid 5 deadly mistakes that most business owners make when planning their exit strategy.
In this comprehensive program, Kerri shows owners how to plan and transform their income producing business into a wealth-producing asset that can be monetized to fund their reinvention, whether they move on to a new venture, adventure, avocation or a favorite hobby. Kerri’s early exit planning approach is revolutionizing an industry where historically, selling business owners are ill equipped to leverage any transaction to achieve their dreams in business and beyond, and only a dismal 10% ever cash out.
As Kerri teaches in Selling Your Business for Maximum Profit, it takes 2-5 years to accelerate growth and maximize value to make a business buyer ready and buyer attractive. In Selling Your Business for Maximum Profit, Kerri takes owners by the hand and leads them through a step-by-step system that Kerri says any business owner can learn and apply.
But until now, no one ever told owners that early exit planning was essential or that it takes just as much time, effort and focus to be able to cash out as it did to start and grow their business.
Selling Your Business for Maximum Profit includes the A-Z reference manual, HARVEST Your Wealth, and the companion 5 hours of audio training alongside the ultimate resource, their own personalized plan creation workbook, to apply these modules to their own business in bite-size pieces.
David Corbin says: “Implement the tools and strategies from HARVEST Your Wealth and you will live and sleep with peace. Why? Because you will control the destiny of your business AND your life. The wisdom and knowledge that Kerri Salls shares in this book is worth its weight in gold, literally. It is a must read for any serious entrepreneur.” And Joel Bauer says: “Without Kerri’s book, HARVEST Your Wealth, you are planning to fail in life.”
Selling Your Business for Maximum Profits reveals Kerri’s simple, step-by-step proven system, enabling any business owner to make their business both buyer ready and buyer attractive so they can cash out of their business to cash in on their reinvention dream. “The key to my effectiveness,” she says, “is based on a coordinated collaborative approach to build value and plan an owner’s exit in parallel. I give readers the decision and planning tools they need, to maximize their profits from selling, scaling or passing on their business to successors.”
Kerri has simplified what is often a daunting and intimidating process down to simple methods, tools, templates and checklists that prepare owners for the biggest payday of their life. It covers:
- How to transform an income generating business into a wealth-producing machine they can sell or scale on their terms and on their timeline.
- How to accelerate growth, maximize value and make their business both buyer ready and buyer attractive
- How to optimize the growth whether they want to sell in three years or thirty years.
- And so much more
Details and purchase information for Selling Your Business for Maximum Profits by Kerri Salls are available at http://www.sellingMP.com.
At This Way Out Group LLC, http://www.thiswayoutgroup.com, Managing Director, Kerri Salls is leading a revolution in the exit planning field. As a prominent exit strategist and mentor who prepares lower middle market owners and entrepreneurs to achieve their optimum exit outcome, she has created a new early exit planning paradigm focused on the selling business owner, starting well before transaction advisors get involved, in order to increase the seller’s leverage at the negotiating table.
Since 2012, Kerri Salls has been the host of the groundbreaking podcast radio show Exit This Way on URBusiness Network and has produced over 160 shows discussing the idea that “it’s never too early or too late to plan your exit.”
TO ARRANGE INTERVIEWS OR TV/RADIO APPEARANCES CONTACT:
This Way Out Group LLC
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Todd Nelson’s article, Small Business: Succession market is booming, baby, in the Minnesota Star Tribune on March 30, 2014, about Richard Burrock, lead partner for business succession services at Boulsy is more anecdotal proof of the demand for succession planning from baby boomers.
In his article, Nelson quoted Burrock: “The need for an exit strategy is gaining urgency as the baby boomers who own 40 percent of Minnesota’s private companies approach retirement.”
He quoted statistics Burrock shared: “More than half of the privately owned companies in the country face an ownership change in the next 10 years, yet an estimated 75 percent have no transition plan in place, Burrock said. Those who don’t are unprepared for life after retirement, with successor owners unidentified, tax strategies unaddressed and business responsibilities that largely have defined them soon out of their hands.”
These are all issues that take time to address and execute, which you can’t do if you wait until it’s too late.
These are the same distressing statistics we’ve been sharing for years to educate and encourage baby boomer business owners to take action.
Nelson quoted Burrock as saying: “To do nothing is a disaster in the making. It really takes away their flexibility. What I always say to clients is, if we plan it properly, you can have it both ways. You can have a nice soft landing and yet you can accomplish your financial goals at the same time.”
Owners need to hear this statement often.
Richard Burrock is another advisor who honestly telling business owners what they need to hear, not just what they want to hear. I concur with his suggestion “that owners begin planning early, at least five years before retirement.”
Nelson substantiated Burrock’s comments by referencing research by Expert Ritch Sorenson, professor of entrepreneurship and academic director of the Family Business Center at the University of St. Thomas’ Opus College of Business. Sorenson’s succession research “emphasizes the importance of developing a common culture that can sustain and be sustained across generations,”
Sorenson also endorsed the advice to begin business [succession] planning early.
If you have questions about your succession planning readiness, contact us to schedule a free consult.
* emphasis is mine.
This data is too important to ignore. In the article below from his Successionplus newsletter, Craig West recaps critical data from Australia research by HSBC. This 2014 data confirms trends we see in the U.S.
As you read, consider if any of these concerns are issues for you and your business too. The HSBC research confirms what we see in TV ads from Prudential; that business owners are not prepared for the cost of retirement and their life expectancy will exceed their ‘money’ by 10 years. They expect their savings to run out about half way through their retirement!
Australians financially unprepared for retirement – HSBC research
Craig West – CEO at Succession Plus in Australia [www.Successionplus.com.au]
According to HSBC research into retirement trends Australians expect their savings to last just 11 out of 21 years in retirement, even though they plan to reduce their living expenses by 33% Contributing to the 10-year shortfall is inadequate planning, a preference for short-term saving, and an underestimation of the cost requirements in later life.
Australians’ pension emphasis similar to other western markets – but similarity stops there.
The survey shows that, despite the introduction of compulsory superannuation [pension] in 1992, the average Australian currently expects 30% of their retirement income will come from the pension, 20% from their super (personal pension), 14% from cash savings, 11% from property, and 8% from shares and investments.
Australians not adequately preparing finances for retirement
According to the survey, Australians anticipate their savings will run out a little over half way through their retirement with nearly 60% acknowledging they are either inadequately preparing for retirement or not preparing at all.
The survey also reveals 56% of Australians have never saved specifically for retirement outside of super. Of those, 47% believe they are being held back by Australia’s cost of living (which rises to 57% for 35-44 year olds).
Australians underestimate their spending needs in retirement
The survey finds that Australians, on average, feel they will need just 66% of their working life income to continue feeling comfortable in retirement – the lowest of all countries surveyed.
This shows a lack of understanding of the increased costs of healthcare as people age and the common statistic that for business owners post retirement spending on holidays and travel etc. can actually rise due to the SME business owner having more time available.
Australians more focused on short-term savings goals
Australians are also not helping their cause by having a short-termism approach to saving. The value of retirement savings reduces more rapidly than any other form of money because of the combined effect of inflation and rising life expectancy, so it is likely that Australians will need more of a savings buffer than currently anticipated.
Strong correlation between financial planning and saving
The survey also finds that Australians who sought a professional adviser increased their savings by 5 times. “With life expectancy on the rise, the need to save and plan for retirement is becoming even more critical. Yet as daunting as the current challenges may seem, the earlier you plan the better prepared you will be.
That last statement is the key to how you navigate this road. Early exit planning increases the value of your business as well as how much you walk away with and when you can afford to cash out. To start planning for the sale, scale or succession of your business, contact us. Your initial consultation is free.
When you started your business, you were more likely paying attention to the value of your product and services to command a good price. At the same time, you probably were not focusing on what would add value to the business itself.
When it comes time to monetize your business, like when you want to sell off equity or find a buyer; that’s when value becomes a serious criteria in your decision process. That’s because value plays a big part in the price anyone will pay for an ownership position in your company. But as Chris Mellon of Delphi Valuations cautioned when I interviewed him on Exit This Way: “Business value does not equal price”.
Value is commonly discussed as if you’ll execute a cash transaction. But other options such as stock transfers, notes, or earn outs with contingencies, are often involved.
A business appraiser does not know the terms of the deal that will determine the price a buyer will pay for your business. Your valuation expert will look at the overall market assuming a cash transaction to come to a value or rather a range of values. It’s called a continuum of value. For example, a business may be worth somewhere between $7M and $13M and that range will vary for different purposes. Fair Market Value (Fair Value) is somewhere in between.
Why have your business valued?
Maybe you will get a business appraisal for compliance such as in financial reporting or litigation even in shareholder disputes or a divorce; or strategic planning, such as exit planning; or for an acquisition or sale.
Business and personal situations vary. You want to consider the value of your business in your overall decision making process, as a business owner but also in terms of its value in your portfolio.
Then there are also the tax implications for various decisions that can prompt getting a valuation of your business. Three common tax reasons that can drive a valuation are to: assess gift taxes, determine estate taxes, or when you convert a C corporation to an S corporation.
When should you have your business valued?
If you are starting your business on the fast-track to an exit (a targeted acquisition or an IPO), you will want to have a valuation performed early as a benchmark.
Beyond the startup phase, most businesses will benefit from having a valuation performed regularly, even yearly in the 3-5 years leading up to your exit transaction. The valuation exercise will reveal enhancements, improvements, growth, and metrics which will demonstrate a pattern of building business value. In turn that sequence of valuations will give a seller significant leverage in any negotiations in any 3rd party transaction. Businesses put themselves at a disadvantage if they pinch pennies and expect to only go through valuation once, when they are already talking to their prospective buyer.
Building business value goes hand in glove with exit planning to achieve your objectives in the business and beyond. Valuation is an exercise to measure the return on your efforts.