Take steps to build your exit strategy
BY MARK FROHMAN
Monday, February 26, 2018
Economic and market changes, legislation or personal issues can all lead to the disruption of a business; therefore, it’s important for business owners to play for the long term.
By long run, we are referring to the owner’s ultimate objectives, which usually are for the business and also personal. Following these steps can help you clarify, accomplish and communicate these important objectives to family, key employees and advisors.
■ Begin with the end in mind: What would you aim to get when exiting the business? The answer may play a major role in many decisions regarding the business such as funding, compensation and expansion. Your exit expectations, established early, will help you realize satisfactory proceeds as well as the timing of that exit.
■ Make it personal: Consider your personal and non-financial goals when defining your expectations. These will aid in judging the compensation and other elements of the exit package you want to receive for the business.
■ Know how the business is valued: Businesses are generally valued using a valuation multiple but smaller businesses often use other valuation approaches. Understanding your company’s valuation multiple or another approach allows you to consider it when planning, making profit forecasts and operational budgets. A professional valuation service can help identify the appropriate valuation approach for your business.
■ Understand to whom you cannot afford to sell the business: Selling the business to a current employee or family member generally results in a lower sale price. Sales to a strategic buyer generally result in a higher price. A strategic buyer typically views your products or customers as supplementing theirs thereby posing immediate market value.
■ Run the business with the end goal in mind: The exit target and plan provide the goals that you, the business owner, can integrate into your planning, priorities and incentive systems. Setting annual performance targets will help meet your target if it is a realistic time frame. Annual reviews of progress and business risk areas to the plan will help you segregate, insulate or insure against both gaps and risks that can jeopardize performance and therefore the value of the business.
■ Enlist others to make it work: Managing a business and its inherent challenges is not easy. Ensure you have the decision-making expertise you need by enlisting internal and external resources to be part of planning and review sessions. Having key individuals and mentors to assist you will help ensure that planning and execution stay on track.
An exit strategy will help guide you toward your ultimate objectives and likely give you less to worry about along the way.
Dr. Mark Frohman is the owner of Frohman Consulting Corp. and a counselor with SCORE, a nonprofit business-consulting group.