ACCELERATING VALUE – THE BEST EXIT STRATEGY

Blog
May 11, 2018 at 12:00 AM
by Dunnington Consulting

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It’s clear – if you own a business, sooner or later, things end.  Whether you’ve spent your lifetime building the company you founded, or are latest in line in the corner office, exits and transitions count.  The key is how to optimize them for both you and the next owner. Here’s some food for thought about this, starting with some bracing facts.

Thought Starters

  • Only 2 out of every 10 businesses that come to market actually sell.
  • Only 30% of family businesses successfully transition to the second generation, only 12% transfer to the third, and the success rates diminish from there.
  • Of those that succeed in the sale of their business, 75% experience “profound regret” within one year of exiting their business.

Studies have shown that business owners invariably overestimate what their company is worth. Totally human and normal, but this is a significant issue if you as the owner have a number you’re counting on – and nobody else’s number is even close. So one issue is how to get a reasonably accurate and objective valuation. (Hold that thought.)

Second, most owners wait too long to prepare their company for an inevitable transition.  In fact, many can’t find enough time to work on their company, because they are too consumed working in their company. The more years of practice at being too busy to improve, the more likely the eventual transition happens in chaos, if it happens at all, with shortcomings likely on both sides of the transition deal. The time you didn’t spend working on building its value along the way is not time you can get back – in enough time to set things straight – just before transition. Transition is where preparation meets opportunity.  (Hold that thought as well.)

Third, and perhaps most disturbing, is that a ton of business value is lost in transition. There are many reasons, such as these above, but when the doors shut, the impact is devastating for owners, employees, customers, suppliers and the communities they operate in. Just ask people in Springfield Vermont – or any company town when the company folds up.

Not surprisingly, it’s often the people issues that are the most confounding – before, during and after – whether it’s the dynamics of succession in a family business, or the complexities of getting the right next owner at the right, best time in her/his career.

Like many demographically-driven issues, business succession seems (to me) to be a real sleeper. It’s hard to miss the demographics – there are a ton of baby boomer business owners coming up to a transition. A “silver tsunami” is in the works, but it’s hard to find actionable data about its scope, pace and timing – what if the booming stock market holds? What if the business cycle starts its long anticipated turn down? How many businesses will transition in your corner of the world and how fast? Is the bench ready to step up and lead? Is there a bench? Can your business run successfully without you?

Here’s a framework for getting on the right path. Be sure to give yourself time, and take these steps to succeed:

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A point of view – do value enhancement or acceleration to prep your business.

1) Think about – and act. Build business value in an ongoing way vs preparing for transition episodically, or when you sense (hope?) an offer might be in the offing…..the last-minute get-ready. In other words, develop the capability for building business value as part of – or the primary focus of – a continuous improvement culture. What you do every day. Build a business that finds better ways, is customer – connected, and innovation – oriented.

Routinely take steps to work on your business. Even putting a value acceleration plan in place involves changing some habits – like working out, or not working out, saving, or not saving, being a parent to your kids, or a housemate, building value or procrastinating.

Recent findings from neuroscience point out how to establish a new habit: take some concrete steps, any size, to work on your business every day, sharply and inextricably aimed at a tangible result. The business equivalent of “brisk walks twice a day, and skip one dinner to lose 3 pounds this week.” In 30 days they say, you will have grooved a new habit.

If you have developed a record of results increasing value, and the metrics that prove it, that will be very attractive to a prospective buyers. I once observed a company expand its operations to Europe, as a move intended to increase its attractiveness as a potential acquisition – but without really putting the people, resources, and processes in place to be successful.

Due diligence revealed a tentative, under-resourced initiative and the company stranded a half-baked investment, while hoping/waiting for a buyer. Not a winning plan. A year and a half later, the company folded after pushing good money after bad. Lesson learned: play the game as if you intend to be around and succeed, not pretty up to sell. The great irony is that the more you are a vibrant, going concern, the better acquisition you are. Said another way, make sure your organization can survive its first good business idea.

2) Get the value metrics right. It’s just a truism in management – you can’t improve what you don’t measure, and you can’t measure what you don’t describe….in an actionable way.

So what do you need, metric wise? It’s silly to commission formal financial valuations at $10 k – ish a pop, the ones that take months and invite reasonable speculation about the guessables like goodwill, capital asset values and IP.

Might I suggest, instead, a valuation approach that:

  • focuses on core, operational value – the what you do and how you do it that creates value for customers,
  • gives you a current estimate of what your business is worth now, that is reasonably accurate (within +/- 10%)
  • includes a competitive reference for how you compare with cohorts in your sector and region (in case your potential buyers have done their homework, or haven’t and you can do it for them)
  • casts your insights as owner in a proven, patented valuation framework, with ROI-based suggested areas for improvement (so you clearly see and can focus on the high leverage, value building activities – no right way to do the wrong things)
  • is online, patented, professionally-certified and secure, so that you get your answers in minutes, not months, at a fraction of the cost, with confidence and without having disrupted your organization getting the data.
  • creates clarity and alignment across the leadership team as to what the value improvement priorities are … a clear course of action.

Contact Me

I can provide a free assessment and free business valuation. If you want to discuss what this is, what it involves and costs, how you get it, and can work with it, then contact me.

Be sure to find a financial advisor you trust to give you’re the straight stuff about your personal situation. The other two key issues – making value improvement a part of daily work in your business – and navigating the people issues in transition – are the focus of the next two articles. Thanks for being here – stay tuned – see you there.

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