60-90% of most business owners’ wealth lies in their business. Most owners do not have a realistic view of their business’ value and its contribution to their overall net worth. Most accounting systems are “tax oriented” and they usually significantly understate the “Real Number” in terms of what the business is worth. Most accounting systems are not built to give feedback on the “Real Number” and what can be done to improve it. The “Identifying Value” phase of exit planning is where a business owner finds out his or her “Real Number” and initiates steps to maximize that value so that they have the option to unlock that wealth.
After properly identifying a business’ value and taking actions to increase that value, a key next step is protecting that value and what we call “De-Risking.” Risk is a major factor in determining value, and a less risky business, relatively speaking, is a more valuable business! The “Protect Value” stage of exit planning is where a business owner formally integrates broad Risk Management into his or her business and personal planning. It’s where business owners perceive risk seriously enough and develop an understanding of risk based “deal killers.” Some quick examples are a business’ inordinate dependence on the owner, lack of documentation, lack of transferable and scalable systems, product liability, EPA/safety issues, and lack of succession or exit planning.
When discussing Building Value, we like to talk about “The Four Capitals:” Human Capital, Customer Capital, Structural Capital, and Social Capital. These “Four C’s” are all drivers of “Intangible Value” and understanding how the highest valued companies in the world perfect these intangible areas is a major key to building great value. It is also important to build a company’s “Tangible Value” which does get us back to what the typical accounting systems allow us to do. With proper assessment tools during the “Building Value” stage, a Certified Exit Planning Advisor (CEPA) can quantify how from going from weak to strong in the Four C’s can have a geometric effect on a company’s Real Value.
The key to Harvesting Value has a lot to do with what we call “Exit Readiness.” Readiness is a state of “fact,” and not a state of “mind.” Two key questions are: “Is the owner ready?” and “Is the business ready? Transition timing is important. The first timing consideration is the owner’s “Personal Timing.” Is the owner tired and burned out or is the owner still on fire every day? The second timing consideration is the “Business’ Life Cycle.” Is the business a start-up with very high growth potential or has the business reached some form of maturity and/or possibly about to enter a decline? The third timing consideration is often overlooked and that is the strength of the “Capital Markets.” If investment capital is abundant through private or public sources, a company will likely sell for more money. If investment capital is scarce, a company may sell for less. The “Harvesting Value” stage of Exit Planning is the process of managing all three of these timing events at the same time and at all times.
Personal preparedness for a liquidity event caused by selling one’s business is a vital step in Exit Planning. Of course, all business owners want to sell their business for the highest price. But careful planning, pre-sale, in areas such as tax planning, investment planning, estate planning, charitable planning, and personal financial planning is vital to a successful outcome. Very few business owners have even heard of a “Net Proceeds Analysis” much less integrated one when contemplating the sale of their business. The Certified Financial Planning Board defines financial planning as “the PROCESS of developing strategies to assist clients in managing their financial affairs to meet life goals.” Even fewer business owners have developed their “Third Act” or their “Life After Sale” plan. The “Managing Value” stage of Exit Planning asks the question “What does happiness look like?” and seeks to ensure that the business owner is personally and financially prepared for a lifetime of…or even generations of… success and significance.