Do You Have An Exit Strategy In Place? Stage One: Value Creation

Saturday, April 30, 2016

As an entrepreneur, you’ve spent time building your business and it might be in the startup phase, growth phase or might be a mature and established business. In any stage of business you should have a plan in place to exit out of the business.

The following are some statistics that you may or may not be aware of:

  • 50% - 75% of business owners want to sell their business within the next 5 to 10 years.
  • 95% of business owners have unrealistic expectations of the value of their business.
  • 80% of business owners have 90% of their net worth tied up in their business
  • 12 months after a business owner sells their company, 3 out of 4 of the business owners profoundly regret their decision to sell because they did not do any exit planning.

As mentioned, every business owner should have an exit strategy in place from the time they start their business. What are some of the exit strategies available to entrepreneurs?

  • IPO (Initial Public Offering): taking the company public through an IPO.
  • Selling the business to a key employee(s) or family members.
  • Selling the business to a strategic buyer. This buyer sees value in your business because it adds to the strategic direction of that company and is willing to pay for that competitive advantage.
  • Selling the business to a financial buyer. The buyer does not see value in your business and will typically not pay more than market value for the business.
  • ESOP (Employee Stock Ownership Plan): implementing an ESOP to give the employees ownership in the company.

Exit planning could take anywhere from 12 months to many years to complete. The plan should consist of three stages: Value Creation, Financial Planning and Asset Protection and a Life Plan. In this article, we will focus on the first stage: Value Creation.

The first phase of an exit strategy is the Value Creation, which is comprised of understanding the value of the business. In this stage, you will start by having an initial business valuation performed to determine the market value of the business. There are different standards of value but market value is what a willing buyer is willing to pay a willing seller for their business.

Understand that it is an initial business valuation because throughout the implementation of the exit strategy there will be a need to continue having a business valuation performed to identify the value that’s been created in the business from the steps taken in the exit strategy as well there may be other reasons that a business valuation needs to be done.

In this stage, key business value indicators will be identified and addressed. The key business indicators will be different for each business but might include such factors as:

  • Market Position: does your company have strong market position or not.
  • Management Team: does the company have a strong management team in place so that it will continue to operate smoothly without the owner(s).
  • Revenue Growth: what are the historical trends for revenue growth and what is the potential revenue growth for the company? Revenues are important to the value of a business.
  • Company Margins: the higher the margins the better – EBITDA and Gross margins. EBITDA is earnings before interest, taxes, depreciation and amortization. Companies typically sell for a multiple of their EBITDA.
  • Breadth and Depth of Products or Services: will be a differentiator from the competition.
  • Seasonality: are your products or services impacted by seasonal purchases or are there consistent sales throughout the year.
  • Infrastructure: what is the quality of the systems and facilities in place.
  • Capital Expenditures: what is the extent of the capital expenditures that will be required in the business.
  • Working Capital: how much working capital is required and has the company planned for it.
  • Financial Controls and Processes: what processes and metrics are in place to manage and track on the company’s financials and cash flows.
  • Contingencies: are there any contingencies that the business has to manage in the short term and/or the long term.

The business value indicators will be identified in an exit plan and there should be recommendations for the company to explore to improve the profitability of the company. This will include all business aspects of the company.

The company and its exit strategy team of advisors will discuss the recommendations and decide who will perform what functions to help the company improve its bottom line as it implements the exit strategy.

Avenue M® Advisors, Inc. helps clients on a regular basis with the Value Creation stage of an Exit Strategy.

If you have any questions on the Value Creation stage of an Exit Strategy, or are interested in speaking with us about your business exit, please contact Avenue M at 818.758.8457.