Assess Financial Readiness. A thorough assessment of the owner’s personal financial situation during this discovery phase is key. Accurate budgeting and cash flow analysis, in conjunction with a thorough analysis of their assets, liabilities, current estate plan, investments, and insurance coverages, can help identify any risks and gaps in their overall financial picture. For many owners, there may be little financial distinction between personal and business expenses. By deeply examining both, one can uncover the true level of living expenses and true level of business operating expenses. Fundamentally, this initial personal financial readiness plan will determine if the business owner has enough money to live on in retirement without selling the business. If they don’t, what would be the minimum amount of after-tax sale proceeds they would need to live comfortably? Whether from a personal, financial, or business perspective, during this process the owner should consider contingency plans in the event that a future business sale does not go through.
Assess Business Readiness and Attractiveness. Getting a business valuation from a qualified professional is a helpful starting point in understanding how ready the business is for selling. Typically, there’s a gap between the value the owner has in mind and the actual valuation. Owners are likely to have heard of a comparable business being sold for a certain amount or a high earnings multiple, and they may be anchoring their expectations to an unrealistic value given where their business stands today.
Diving deeper into understanding the company’s operations and culture, strategy and vision, structure, industry dynamics, employee dynamics, core customers, supplier structure, brand promise, financial position, key performance indicators, facilities, technology infrastructure, and market position can help identify areas of improvement. Addressing these areas can increase the company’s future exit sale value.
A few imperative questions to answer are: what stage of the life cycle is the business in? Does it have growth potential, or is it in a mature or declining stage? Additionally, how dependent is the business on the owner? Oftentimes, an owner is leading many different business functions (sales, strategy, human resources, etc.), making the business less attractive to potential buyers due to overreliance on the owner. If identified, structural changes may be necessary once one has moved into the preparation phase of exit planning.
From Discovery to Preparation. With the discovery stage completed and personal, financial, and business readiness evaluated, along with a prioritized action plan in place, it’s time to gather a team of professionals who can bring successful outcomes to fruition. This team should include the business owner’s CPA, financial planner, insurance advisor, estate planning attorney, business attorney, transaction attorney, and business value growth consultant. Later in the process, an investment banker or business broker should be added. The optimal team members will have best-in-class skills and knowledge in their particular areas and should also have a collaborative mindset, focusing on bringing forward an optimal exit planning process and result.
Some owners prefer a team that is predominantly from one company, believing it will streamline complexity and save time. However, it’s unlikely the best-in-class advisors across diverse disciplines would all come from the same firm. This structure could stifle healthy debate and creative ideas. Moreover, specific experience in exit planning is a must to avoid potential pitfalls and landmines in the process. As the team is built, efforts should focus on de-risking the previously identified personal and business risks.
