Business owners seldom seek to exit their businesses without attaining financial security.
They understand that one requirement of financial security is to grow business value, but many struggle to achieve this goal.
Fortunately for these owners, exit planning can directly address their need to build business value and serve as an unexpected solution for owners who want to increase their businesses’ value, but don’t know how.
One of the pillars of exit planning is a timeline that plots the value-building actions owners should consider in order to position themselves to exit their businesses on their chosen exit date. This timeline incorporates how much the business needs to grow in value to meet the owner’s financial target by the owner’s departure or exit date.
The timeline is created after the business owner’s professional advisors assess the owner’s current resources – especially business value and cash flow – relative to the owner’s financial needs post-departure.
For example, a business owner may want to exit in five years with $250,000 of post-exit annual income. Her advisor team may determine that the value of her business must grow from $3 million to $4.5 million for her combined ownership and other assets to provide what she needs to achieve her goals.
They may also determine that growing cash flow (or EBITDA) by $100,000 per year would likely create that value. Action items and anticipated benchmarks are added to the overall exit planning timeline to keep everyone focused on what needs to be achieved and when.
Following the creation of the timeline, the next exit planning step is to assess the strength of the company’s value drivers.
Value drivers are activities that create value in a company. Third-party buyers, private-equity firms and even key employees often require businesses to have strong value drivers before they consider purchasing the business. That’s because value drivers often create sustainable, recurring, scalable and ever-increasing cash flow.
Some of the value drivers that you may install in your business include:
Johanna F. Still - May 16, 2022
Staff Reports - May 16, 2022
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