By Michael Torney, J.D., CFP®, LL.M., CEPA
While your company’s goalposts, objectives, and operations may evolve often enough, one thing has always stayed true: eventually, you’ll need to exit your business.
You’re likely aware that prepping early is important—but just how soon should you really start planning? The most meaningful opportunities to protect and grow business value tend to exist years before a transition is on the calendar. Plus, with exit timing often being triggered by an unplanned event (say a family need or sudden opportunity), being proactive is key. Preparing yourself and your business well in advance offers critical time to consider and address potential pitfalls, strengthen your value drivers, and expand the range of exit paths available when the moment arrives.
Meaningful planning can happen at any point, even near the point of exit. The earlier you begin, however, the more flexibility and leverage you have. Here’s what you can do now to prepare for an eventual exit from your business, whether you’re 3 years, 5 years, or 10+ years away.
Identify Potential Gaps
No matter when planning begins, start simply enough by asking what’s standing between you and a successful exit. Acknowledging where these potential gaps exist can help you better determine what to focus on in the coming years, especially as you look to shore up your financial standings and maximize the future sale of your business.
Wealth Gap
What do you need to sustain your lifestyle beyond your business? For most, there’s some meaningful distance (a wealth gap) between how much they need to meet their needs post-exit and the assets they already have outside of the business (retirement savings, taxable accounts, savings, etc.). This wealth gap can help you better understand what you need your business to sell for, after taxes and fees, in order to fund your next chapter.
Depending on your timeline, your path to closing the wealth gap will likely vary. For example, a longer planning runway may give you the time and opportunity to improve your business’s value drivers. Meanwhile, a shorter runway may put more pressure on the sale itself—limiting your options.
Profit Gap
Say your business generates $1 million in revenue at a 10 percent profit margin. Yet, if comparable businesses operate at 15 percent profit, that $50,000 difference represents a profit gap that could be potentially improved through some strategic changes. Closing this gap can not only improve annual earnings but potentially improve your business’s valuation over time as well. The earlier you start this process, the more flexibility you have to improve margins without destabilizing or disrupting operations.
Value Gap
The value gap reflects the business value left on the table by not operating at best-in-class standards. It compares your current earnings and valuation multiple against those of higher-performing peers. Closing the gap entirely may not always be attainable, especially depending on your timeline and risk tolerance. However, it can offer some important perspective on how much value you might be able to capture if certain changes are made.
Create a Timeline
If you’ve put some thought into your eventual exit, you’ve likely considered when might make the most sense to leave—assuming you’ll be able to do so on your terms.
As you prepare for the transition ahead, ask yourself:
- How long am I willing to stay in the business?
- Would a phased transition work for me?
- Do I need to exit as soon as possible, or can I withstand a longer runway if needed?
When reflecting on these questions, it’s helpful to consider how your timeline can shape your business opportunities and limitations. For example, a 10-year timeline will give your business maximum optionality to do things like:
- Explore your desired exit path
- Make meaningful refinements
- Address obstacles
- Focus your leadership team
As that runway shortens, planning becomes less about transformation and more focused on preparation and risk mitigation. Ultimately, your vision for your business and legacy may also help determine your personal timeline.
Regardless of the timeline you choose, many of the changes that can eventually improve profitability, sellability, and valuation require time and ongoing effort. Clarifying your timeframe early on will help you and your advisory team make the biggest impact based on your anticipated exit.
When Should You Obtain a Business Valuation?
Even for owners who feel confident they understand their company’s worth, an independent evaluator can provide an objective, industry-specific assessment. These valuations consider the major factors impacting your business’s valuation, including financial, operational, and relational value drivers.
While an enterprise evaluation assessment (EVA) requires your leadership team’s time and some upfront expense, it provides essential insight into:
- What your business may be worth today
- How similar companies are valued
- Which factors influence your position
- What changes could help maximize value before a sale
With years of runway ahead of an anticipated exit, this information gives you control over what happens next—meaning you can use it to ultimately form the foundation for strategic planning over the coming 3, 5, or 10+ years.
Keep in mind, there is no guarantee that making changes to your business (based on the findings of an EVA) will produce a specific outcome, and market conditions can evolve. You’ll need to take into account how long you’re willing to wait to sell, what level of risk you’re comfortable taking, and how much uncertainty you’re able to accept.
Conversely, many owners underestimate how much value may be left untapped—especially when they neglect to obtain a business valuation early on in the exit process.
Building Your Exit Strategy
Running your business as if it were for sale (well before an actual exit) can help you increase its value, improve EBITDA, and widen your options for an optimal exit.
Keep in mind, a decline in health, divorce, market disruptions, disagreements among owners, and other life events can happen at any moment. If they do, you may be forced or compelled to transition out of the business sooner than expected.
As you start to think about your eventual exit (even if it’s more than a decade away), you’ll have questions about what your business is worth and how to optimize its value. If you’d like to learn more about how a business valuation can help you plan for your eventual exit, fill out the form below to request advisor outreach.
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