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If you ask a number of fellow business managers if they have an exit strategy, they are likely to tell you they do not. In fact, recent studies by the Exit Plan Institute show that 66% of the current U.S. business market is owned by Baby Boomers, who are poised to transition in the next zero to ten years and of these, only 20-30% of these companies that go public end up selling; leaving up to 80% without solid options to harvest their wealth and ensure economic continuity into the next generation.
An owner who is "ready" with an attractive business greatly increases the likelihood that the business will survive a transition of command. The question is, how prepared are business owners?
What is an exit strategy?
An exit plan is a blueprint for how a business owner will convert business value into personal wealth: how they will move on to the next chapter of their life with peace of mind, knowing that there is a plan to transfer ownership on their terms and schedule.
To establish an appropriate strategy you must begin by addressing these questions:
- What is the financial value of your company today?
- How much can it be worth at the time of sale?
- What can be done to increase the value of the company?
- How will potential challenges be met?
- How much money would you be willing to sell your company for?
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Benefits of having an exit strategy
The main benefit of an exit strategy is to know the real price of the company and to get the maximum percentage of profit from the sale. But it will also allow for a planned and easy transition for employees.
In addition, a successful strategy will include methods to increase the value of the company. As well as the possible exit routes. Making it clear that viability will depend on which alternative leaves the maximum monetary gains and guarantees continuity in all aspects.
Having this plan in place will indirectly avoid the worst case scenario: bankruptcy. A well thought-out exit strategy has the ability to guarantee success. What it seeks is to maximize profit at the end of the road, and for that it is necessary to build the foundations throughout the growth process.
It is essential to professionalize each area of the company, especially the commercial area. How can this be achieved?
Those who make up the commercial area of the company will be crucial in the strategy, since they have the ability to measure the value of the business. The Commercial Director will be able to help evaluate and analyze who could be potential buyers or work together with the successor if that is the case.
Meeting with them from time to time to assess the company's ongoing performance will be crucial in addition to:
- Train them at least annually
- Engage a mentoring program to support growth
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Evaluating options: closing vs. selling
Selling or closing can be two great options in an exit plan. Let's explore the advantages and disadvantages:
It all depends on who you sell the company to. If you sell to an acquaintance or family member, it is more likely that the project will continue with the same values and mission and that there will be continuity in terms of strategy. It also lends itself to a smooth transition for your employees. Although, that may reduce the price of the company.
If you do business with a larger company, you increase the likelihood of getting your company's real price. But perhaps the employees would have adaptation challenges and the company could change its strategic focus.
It is important to keep in mind that having a defined exit strategy allows us to provide potential investors with the necessary projections of how and when they will start earning profits, which is a determining factor at the time of investing.
Investors inject their capital with the primary objective of achieving growth in the value invested, rather than just recovering their investment.
Closing the business may seem like a drastic decision. But, depending on the value of the company, you can just sell the assets, pay off debts and pay all expenses. Then you can enjoy the remaining profits. So, it's an option on the table.
Steps/tips for developing an exit plan
We give you a step-by-step approach to developing a successful exit plan. Keeping in mind that, the first common step is to know how much the business is really worth. Next is:
- Study your options
For most business owners, when to sell and to whom to sell are important decisions. Transferring ownership of a business can affect many people, including family members, employees, suppliers, customers and an entire community. The exit planning process must continually clarify the goals, desires and intentions of stakeholders. It should crystallize the owner's vision for the business, his or her desired involvement during the transition, and the company's future leadership.
Invest in consulting and planning
To help owners make decisions, the exit planning process should include an evaluation of the business and its opportunities. The current market valuation of the business should be estimated for different types of transactions and buyers.
The sale price to a strategic buyer may differ from the price to a financial buyer or investor. If selling to employees or family members is an option, the valuation may be different compared to selling to a third party because there may not be synergistic savings and cross-selling opportunities with an internal transfer.
Strengths and opportunities should be evaluated and highlighted and potential weaknesses and threats identified that will inevitably arise during the sale and due diligence processes during the transition. Examples of value drivers include the company's unique selling proposition, customer concentration risk, profit margins, senior management experience and growth.
The development of the plan will depend on how complex the transition will be. If the sale is to a third party, you will need legal services, accountants or investment brokers. On the other hand, if it is to a family member, you should seek the advice of other professionals, such as a financial planner, for example.
- Communicate with collaborators
If you are going to sell, you must transfer leadership. That means not only talking to the teams in an empathetic and transparent way, but also being constantly training leaders and advocates. If the plan is to close, you must also be transparent.
- Talk to customers
If you chose to sell, you should introduce the new owner to your customers. On the other hand, if you are going to close, give them alternatives to acquire what you were offering with competing companies that can meet their needs.
At Innova MS we know that in order to achieve your objectives and carry out the creation of the exit strategy, it is extremely important to understand in detail the current situation of the company, its organizational structure, its commercial strategy, its commercial management model, the skills of its sales team, among other details.
So, if you are designing your exit plan and you encounter any of these challenges:
- No alignment between commercial strategy, day-to-day management and execution in the field
- Poor communication and follow up between marketing and sales
- Many agreements and commitments made by the commercial team are not followed up
- You have low or inconsistent salesperson productivity.
Let us accompany you with a diagnosis of your business area and our mentoring programs.