Exit Planning and Business Timing

What is Exit Planning?

Exit planning is a process for understanding and evaluating your personal, financial and business goals together. It provides a framework for decision making and a roadmap for execution. The exit planning community encourages owners to ask this important question – “Should I Grow or Exit” – on a quarterly basis. The highlights of exit planning include:

• A holistic view of personal, financial and business goals
• Assembling a trusted team of advisors
• An initial assessment of the business strengths, weaknesses, opportunities and threats (SWOT)
• A valuation of the business (or evaluation of the worth of the business)
• A regular cadence of assessment and structured decision-making
• Addressing risks first in the priority of initiatives
• Evaluating growth opportunities and their alignment with internal competencies

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When Should a Business Start Exit Planning?

Planning for an exit should begin early. Some would argue that exit planning should be considered prior to owning a business. This means that you would evaluate startup opportunities or business acquisitions with the exit in mind. Considering your goals, timing and the ability to exit down the road will influence the type of business you start or acquire.

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How Often Should I Consider Selling or Keeping My Business?

A prudent entrepreneur and even a lifestyle business owner should have an exit in mind before starting or acquiring a business. Then they should regularly revisit their exit plan throughout their ownership.

Exit planners and value growth consultants encourage business owners to establish a regular cadence of activities to increase value. This consistent set of activities includes asking the “grow or exit” question on a recurring three month basis within a planning and strategy session.

Smaller business owners who don’t have the budget for pricy consultants can find cost-effective resources to learn value growth and exit planning on their own. These resourceful owners can apply the same best practices at the right scale to suit their business.

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Urgency In Deciding to Keep or Sell a Business

Many business owners sell under fairly urgent conditions. Even a plan to retire next year makes selling a challenge. It can take a year or more to sell a business and the buyer may require a lengthy transition from the seller. Business owners under-estimate the value of exit planning and the time required to do it well. Seventy percent of business owners never do any formal exit planning.

Here are the conditions that make the decision either urgent or not urgent. You can imagine how selling under urgent conditions will not maximize the sale of the business. Worse yet, it may put the business in the majority of businesses listed for sale that never sell.

Important but not urgent activities are often unaddressed to the detriment of the business. These activities include planning, strategy and anything that falls into the category of working on the business (as opposed to working in the business). It includes the question “Should I Sell My Business or Keep It?” Whether urgent or not, the consideration to sell is always important.

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Who Helps Business Owners with Exit Planning?

Exit planning is a specialized consulting field comprised of specialists from various backgrounds. The Exit Planning Institute (EPI) offers training and certification to professionals that work with small business owners. Their CEPA certification (Certified Exit Planning Advisor) has been achieved by thousands of professionals, primarily CPAs, wealth advisors, and M&A advisors and family business experts. Their training takes a holistic approach that includes business, personal and family wealth planning.

Corporate Value Metrics offers the CVGA certification(Certified Value Growth Advisor). This training and certification program does not have a holistic approach, meaning it leaves out personal goals and personal wealth issues. This certification program focuses on business valuation and business growth with a thorough treatment of financial topics. It also provides detailed systems and metrics for benchmarking all the key functions including Planning, Leadership, Sales, Marketing, People, Operations, Finance, and Legal.

Value Growth Consulting is a similar consulting specialty that touches on valuation, benchmarking, growth strategies, succession planning and exits. Some of the leading consulting programs / networks in this field include the Value Builder System and Entrepreneur Operating System. These programs focus more on value growth than exit planning, while the CEPA and CVGA certifications emphasize both.

There are many other franchise and independent consultants that specialize in sales, IT, or financial consulting or provide outsourced functional leaders such as outsourced CFOs or VP of Sales. For overall small business consulting, a couple of leading franchises include ActionCoach and Focal Point Business Consulting.

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How Long Does Exit Planning Take and How Much Does it Cost?

Initial fees for exit planning or value growth consulting may range from a few thousand dollars to tens of thousands of dollars. These initial engagements may include a business valuation, detailed assessments of the business, SWOT analyses, and strategic planning. These engagements may stand alone or be combined with ongoing monthly consulting and coaching.

Ongoing monthly fees may range from one to ten thousand dollars depending on the size and complexity of the client’s business. These ongoing engagements include building internal teams, assembling an external team of advisors, planning, implementation, accountability, tracking and analytics, developing a cadence, and reaching goals. Ongoing engagements may last 6-18 months or longer. Some clients consider perpetual engagements as extensions of their management team or an alternative to a board of advisors.

Certified exit planners may charge $5000 – $25,000 for initial assessments and $1-10,000 monthly retainers to guide you through value building transformations.

Businesses with budgets for exit planning or value growth consulting can track their return on investment. Some business owners may realize that running a lean payroll and engaging in external advisors may provide better results or a better return than staffing a full executive team. Others may utilize exit planners or value growth consultants to help define executive roles to be filled.

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What Type of Business Should Consider Exit Planning?

Whether you’re a main street business or a multi-million dollar manufacturer, start early with the exit in mind. Businesses of a certain size will have many functions including finance, accounting, human resources, legal, sales, marketing, operations, and executive management. Exit planners and value growth consultants will address all of these functions.

Smaller or simpler businesses may not have all of these functions. However, they can still benefit from benchmarking their business value and setting a plan to grow value and position the business for an eventual exit. While very small or simple businesses may not have the budget to hire exit planners or value growth advisors, they may benefit from targeted consulting assistance from time to time to focus on bottlenecks or pain points such as staffing or sales.

Owners of very small businesses with limited budgets should take the initiative to learn exit planning and value growth concepts to be better prepared for the unknowns. I recommend starting with three books.

Links*	Book Recommendations
	The Lifestyle Business Owner – Aaron Muller Main Street businesses under $1M in revenue
	Buy Then Build – Walker Deibel Larger businesses over $1M in revenue
	Finance Basics for Managers – Harvard Business Review Perfect reference guide for business owners and intermediaries
	Traction – Gino Wickman Handbook for optimizing business by the creator of the Entrepreneurial Operating System® (EOS®)
	Built-to-Sell – John Warrilow An easy read by the founder of the Value Builder SystemTM
	Walking to Destiny – Christopher Snider An in-depth framework written by the founder of the Exit Planning Institute

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When Is the Best Time To Sell a Business?

To maximize the proceeds of a sale, the optimal time is when profits are on the rise. However most owners find it difficult to sell when things are going well. Owners need to understand that positive runs become more difficult to sustain the longer they last. They should also know that significant improvements are needed to affect their multiple of earnings used to value the company.

Did you notify the economy, the environment, the politicians, the earth, the sun, the moon and the stars to align for the perfect exit on your time frame?

The challenge for an owner is to honestly assess their ability to maintain positive trends or at least be consistent well into the future. Once profitability is on a downward trend, the owner will chase their selling price downward. Stagnant or declining performance can have devastating effects on the likelihood of a sale, let alone the sales price.

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Identifying Risks for Business Owners

Whether a business is doing well or not, an owner may lose interest in selling once they learn the fair market price for their business and calculate commissions, attorney fees and taxes on the sale. They set aside thoughts of an exit and optimistically move forward. An owner may experience a decline in performance despite their best efforts. Declines can be caused by much more than the owner’s skills and determination. Here is a list of the many risks factors business owners must accept, including internal and external factors outside of the owner’s control.

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Exit Planning Addresses Risks

One of the pillars of exit planning is to strengthen the foundation of the business before pursuing possibly more interesting goals such as new products, new services, expansion, or hiring new employees. Business owners may not realize that reducing risks will add value to their business, and probably faster and at lower cost than growth initiatives.

Risk mitigation is the low hanging fruit of value growth. Plus there are obvious benefits to risk mitigation besides increasing value, such as increasing the long term viability of the business. With a comprehensive risk assessment prioritized in the value growth and exit planning process, the business will be on more stable footing to pursue the other goals in its strategic plan.

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How Risks Can Effect Timing of an Exit

Scenario 1

An owner nearing retirement had increased profitability over the past three years and the most recent year brought in $500,000 in profit. At the time, the multiple for a business of this size in this industry was 3, meaning the owner could sell the business for approximately $1,500,000. The economy was good so lending was widely available at low rates, enabling him to garner interest from many qualified buyers.

Because the outlook was good, the owner decided not to sell and set a goal to run the business for five more years. During those years, various things outside his control caused the performance to decline. In subsequent years 1 through 5, his profits were $400,000, $450,000, $400,000, $350,000, and $300,000 respectively. Despite the best efforts of his business broker, the buyer for this business discarded historical profits and focused on the most recent year. With declining profits, the owner sold his business for $600,000, a multiple of 2 times the most recent year profit. Those five years of extra work brought him an extra $1.9M in profits, but $900,000 less on the sale of the business for a net result of $1M or $200,000 per year. Given the time value of money, potential returns on investing $1.5M five years ago, and the five years he spent with little time for family and other activities, he regrets not selling five years ago.

In this example, the owner worked 5 extra years for questionable gain. Scenarios like this are not uncommon. Some real life situations have turned out better, and some worse.

When a positive run is followed by a decline, the owner may find themselves working a few extra years for free.

Scenario 2

Private Equity was hot for local and regional skilled trades businesses. PE firms would consolidate businesses in industries such as solar installation, plumbing, HVAC and roofing. Their plan was to leverage centralized functions handling recruitment, technician training, marketing etc. Jack owned one such business on the small end of the private equity sweet spot. He saw that his bigger competitors were being acquired and decided to grow his company a few more years for a larger pay day. Fast forward three years and the private equity interest in his industry subsided. Most of the boutique PE firms were struggling to maintain pre-acquisition performance levels, let alone absorb, integrate and streamline their acquisitions. Jack’s friends who had sold their companies were disappointed in their equity stakes in the new company that had acquired them, but at least they received sizable sums at closing. As the PE industry does, they moved on to their next shiny industry and Jack missed his window. 

Failure is much more common among these companies (private equity acquired firms), with only one or two out of a dozen making any significant return for the firm and its investors.

Investopedia

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Businesses That Require Lengthy Transitions

When the owner has extensive knowledge that is narrow and specific to a niche, or has customers that require a seamless, if not undetectable, transition to new ownership, the best approach may be for the seller to stay on with the new owner for a year or more.

I had an owner of an industrial oil recycling business who had the foresight to call me while he was still available to work for at least two more years. The business had several revenue segments, including custom system builds, recycling services, industrial oil distribution, and equipment rental. None of it was rocket science and anyone with good mechanical skills and a problem-solving mindset could handle the business. While the technical aspects of the business could be learned by many people, a new owner would need at least two years to live through a large enough sample of customer requests and questions to comfortably take over.

In the end, the buyer structured a deal with a down payment, with quarterly earnouts spanning two years. The owner would work full time and receive a nominal $40,000 salary in addition to the earnouts. The down payment plus the earnouts would equal the contract sale price. The owner was happy with this arrangement given that the buyer had the skills and mindset to be easy to work with and have a high chance of achieving the earnouts. The buyer was happy to minimize his risk and keep the owner actively involved and incentivized through a lengthy two-year knowledge transfer.

Owners with businesses like this that require a lengthy transition must factor that into their exit timing. Those who offer a few weeks to a few months of transition when a few years are required, almost never find the perfect buyer who can take over quickly.

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Conclusion

Timing is like nature. You can’t fight it, but you need to understand it and work with it. Mastering timing means paying attention, being prepared, having options, and choosing wisely.

You may have come to this article in search of answers for your situation. While I can’t tell you whether you should keep or sell your business, I will say it would be wise to embrace exit planning either on your own or with professionals.  Not only will they guide you in the “grow or exit” analysis and plan for an exit that could be near term or long term, they have the skills and training to help you grow if you determine that is your best option.