Five things you need to do prepare for a successful exit
- Sam Brownell
Are you a business owner planning for retirement? Are you evaluating ways to ensure a fair valuation of your business and steady returns as you plan for life after ownership?
If so, this article is for you. In this post, I’m going to dive into the things I recommend that any business owner do who is planning for retirement—and is considering employee ownership (EO) as a succession plan.
Your exit plan: Five critical steps for success
Step 1: Find out how much your business is worth
It’s important in your retirement planning to determine the value of your business—that is, get a valuation.
What I’ve found from working with hundreds of business owners on their exit strategies throughout the years is that some will overestimate the value of their companies. That’s not to say that your business doesn’t have a lot of worth. But its value may be less than you think.
When you’re in the throes of running a business and have poured years of blood, sweat and tears into it, it’s easy to inflate the value of your business. Unfortunately, years don’t matter when it comes to the valuation. Instead, when looking at the valuation of the business, you may want to consider three approaches:
- Asset approach: The fair market value of your assets minus the adjusted value of your liabilities.
- Income approach: The present value of your projected future cash flows.
- Market approach: What similar businesses have sold for over the past 3-5 years.
A quick note: There are other methods to calculate a possible sale price for a business, including a thorough debt capacity analysis to determine at what price a company can sustainably purchase an outgoing owner’s shares. Not every ownership transition requires a certified valuation.
If getting a certified valuation, use an independent credentialed appraiser to figure out the valuation of your business. You can search for them on the National Association of Certified Evaluators and Analysts (NAVCA) database. And if also working with an organization like Project Equity for the transition of your business, you can take advantage of additional support throughout your journey.
Step 2: Develop your leadership team pipeline
Oftentimes, the biggest impediments to a successful transition are the people. If you don’t have the right people in the right spots, it may not go as smoothly. You need to have good management and good leadership in place for your succession plan to be successful.
This means not just having leaders and managers set up for the immediate transition, but for when they leave as well. At some point, your current leaders will move on. Other key people may exit when you do (or shortly afterward), especially if they’re in a similar age bracket.
Start developing your future leaders early. Know who the next generation of leaders will be in your business. They may even get involved in decision-making and governance processes during the transition process or after.
Step 3: Document your processes and procedures
Ensure you have standard operating procedures (SOPs) in place when you exit, whether for business development, finance, operations or other aspects of your business. Ask yourself this question: “What happens if I go on vacation for six weeks and I don’t pick up my phone or answer any emails?” You want your answer to be “Nothing” to ensure that your business is ready for a successful ownership transition.
It’s important to create policies and documents about where decision-making authority lies after you exit. One of the biggest concerns business owners have when transitioning their business to their employees is: “Are we going to become too cumbersome in our decision-making process that we aren’t agile enough to react to economic or industry situations?” Creating decision-making SOPs will ensure your employees are empowered to make decisions and have the time needed to do so.
Use these SOPs to bring clarity between decisions at the governance level (i.e., high-level, strategic decisions) and the business operations/management decision-making level. That will allow the designated people decision-making roles to make necessary decisions.
Work on the business while working in the business. After you set up your SOPs, get feedback: Are they easy to understand? Make sure people can access them and use them. Make them living, breathing documents. Translate everything that you know in your sleep into processes and procedures your employees can smoothly follow after you exit the business.
Step 4: Evaluate your key customer base
Look at your main customers and determine how diversified your customer base is. You’ll want to have a diversified customer base (if possible, depending on your business and industry) to ensure continued success if any of your big customers leave.
Then there’s the succession plan. Ask yourself: “How do I maximize value with my customers and make the relationships sustainable and successful?” How will you transition the customer relationships once your business is employee-owned and you’ve exited? Set up a strategy to ensure a smooth turnover of relationships after you leave. If you don’t have a strategy to transition key customer relationships, they will likely transition to your competitors.
Step 5: Look at the books
Evaluate your financials—that is, your balance sheet and your profit and loss (P&L) statement to see if you can easily understand your business’s financial position and performance. Look at your EBITDA (i.e., your net income before taxes and non-cash expenses), debt capacity analysis and cash flow projections. Start with your accountant and then get a valuation so you can better understand the due diligence a buyer will perform.
Have you ever loaned any money to your business in the past? That’s not uncommon with business owners. However, make sure those loans are paid back before the transition.
Look at your receivables. Do you have any customers who are past due by 90 days or more? Do you have a plan to collect from them? If not, it’s time to write off that money.
Just like your SOPs, your goal is to make sure your financials are understandable to any outside person. As you go through the transition process and especially following the sale, your books will be looked at by your employees. Therefore, get your books cleaned up, readable and easily understandable before the transition occurs.
A strong exit strategy sets your business up for success
Preparing for a business exit isn’t just about stepping away—it’s about ensuring your legacy, your financial security and the continued success of your company. Employee ownership offers a structured, values-driven path to ownership transition, keeping your business stable and rooted in your community.
By following these five critical steps—valuing your business, strengthening leadership, documenting processes, evaluating customers and cleaning up finances—you set your company and employees up for long-term success. Start early, plan strategically and your exit will be as rewarding as the journey you took to build your business.
Project Equity can guide you through the process
Interested in learning more about exiting your business and if EO is right for you? You don’t have to go at it alone. Sign up for a free consultation with one of Project Equity’s EO experts and learn how we can be there with you every step of the way.
