January 7, 2021
By Walter Deyhle, CPA/ABV/CFF, MAFF, CExP™, CEPA, Tax Partner and Director of Exit Planning Division
Is 2021 the year you will begin planning your future exit from the company? It might be the smartest resolution you ever make. Studies show that business owners who are the most successful in exiting their businesses begin planning their exit at least 5 years in advance. Even if you don’t have 5 years, as a business owner there are still some basic principles you should consider to increase the value of your company.
Your 2021 To Do List for Exit Planning
1. Establish some clear goals and objectives for your future exit. Think about what you want to do after you sell the business – what is your life plan? You should determine how much money you will need from the sale of the business and whether there is a gap. When and to whom do you want to sell or transfer the business?
2. Consider your legacy, including what happens when you leave. What is the legacy you want to leave behind? Answer every employee question of you with “What would you do if you owned the business?” Your goal should be to cultivate employees who think like owners so they can start answering their own questions without coming to you.
3. Stop chasing revenue and develop a “value” mindset. Design and implement a plan to build transferable value that will help you enjoy a future exit on your own terms. The focus should be on growth and profitability as well as strengthening your value drivers. Surround yourself with a team of experienced advisors to help you focus on what’s important.
4. Start surveying your customers using the Net Promoter Score (NPS) Have you ever been asked by a company whether you would recommend them to others? NPS is the percentage of customers who are “promoters” minus the percentage of customers who are “detractors”. It is a fast and easy way for your customers to provide feedback, and it is predictive of your company’s future growth.
5. Drop the products or services that depend on you. A bigger company is not necessarily a more valuable one if the extra sales come from products and services that are too reliant on you to deliver them. This reliance monopolizes your valuable time and does not contribute significantly to your business value.
6. Differentiate your business. Refine your marketing strategy to emphasize the point of differentiation that customers value. Be relentless in highlighting this advantage and make strategic investments in marketing tactics that emphasize how you are unique compared to your competitors.
7. Focus on your niche. Be disciplined in your approach to sales and growth. The most valuable companies have a defined niche selling a few differentiated products and services to many customers. The least valuable businesses sell lots of undifferentiated products and services to a concentrated group of buyers.
8. Reduce your accounts receivable (AR). Focus on collecting more money up front and reduce your aging AR. Slow AR is not only an expense to your company, it puts you at significant risk during times of economic uncertainty. Turn a negative cash flow cycle into a positive one and you will boost your business’s value and reduce your day-to-day stress.
9. Create more recurring revenue. There is no better way to develop a more predictable cash flow. Sales from subscriptions or recurring contracts mean less stress in the short term and a more valuable business over the long run. Potential buyers are looking for guaranteed cash flow, more certainty around forecasts for sales and growth and less risk.
10. Find a backup supplier for your most critical raw materials. Do not wait to be surprised by a disruption to your supply chain. The impact to your bottom line could be significant unless you have a backup plan. Consider placing a small order to establish a commercial relationship and diversify the sources of your most-difficult-to-find materials.
11. Create a policies and procedures manual. Even the smallest businesses can benefit from documentation of their most important processes. These manual(s) (perhaps by function or department) should be updated at least annually. Policies and procedures not only improve efficiency and reduce mistakes, they also provide for business continuity in the case of unexpected business interruptions. The COVID-19 pandemic is proof that many risks are unknown and unavoidable.
If 2021 is your year to begin planning the sale of your business, experienced valuation and exit-planning consultants can help you evaluate your current position and develop a successful exit plan that accomplishes all of your goals.
Contact Walter Deyhle for more information on exit planning .
Walter H. Deyhle, CPA/ABV/CFF, MAFF, CExP™, CEPA