I recently spent a week in Chicago to earn a certification in business exit planning. I am now officially a Certified Exit Planning Advisor and I will share a lot more about this as time goes on. This month, I want to share a concept that exit strategy IS business strategy with the following points:
- Exit strategy for most lower-middle market companies (defined as annual revenue between $5 million and $100 million) is about creating, harvesting, and preserving family wealth for generations to come. Most owners of businesses this size are focused on creating the largest annual take home pay and not focused on creating, harvesting and preserving wealth. While the two can be similar, they can be very different in the actions required to create and preserve family wealth.
- A great deal of exit planning pertains to implementing good business practices. Best in class business practices create more value, whether the ultimate transition is to the family or to internal or external buyers of a company. If you are transitioning your business to your family, you want them to have the odds stacked in their favor for success. If you are selling the company to internal or external buyers, better business practices will most definitely translate to additional value you will realize as a seller.
- Focusing on enterprise value drives positive outcomes for all, including a better lifestyle. Key performance indicators can be implemented that track enterprise value and the change in that value over time.
- Investing in business strategy is justifiable when growth of enterprise value is the goal. Most business are traded at a multiple of earnings, and as the profit of a business grows you, can expect that the value of a company will grow exponentially. As an example, if you are able to increase your profit (typically referred to as EBITDA in a transaction) by $500,000, you can speculate it will increase the value of your business by $1.5 million to $4 million, which is a multiple of three to eight times earnings.
This is a very small snapshot of my learning in Chicago. Over the next several months, I will share much more, including some of the ways to enhance the value of your business and the seven primary ways to exit a business.
Tax returns, financial statements, IRS communications and similar items are vital to address and process, but they should not be the focal point. Think of these as tasks to get to the real work, which is providing you the information you need and an interchange of ideas to move you forward. The goal is to help you implement your strategies and vision. This is what we do!