Want to Get Out Someday? Get All In Today

Plan for your exit as if your business is for sale now

By Michael Kenneth

When it’s time to sell the house, what do most people do?

Typically, they invest anywhere from hundreds to tens of thousands of dollars to make the repairs and cosmetic improvements that will make their homes most appealing and attract the highest price.

Gutter repairs. A new furnace. A fresh coat of paint and new carpeting. They’re worth the cost. After all, selling a home is something most people do only a handful of times in their lives.

But smart home sellers take a different, more intentional, mind-set. Their homes always are for sale. They make accretive improvements—not just simple maintenance—along the way so their homes always maintain their highest appeal and sale value.

But when it comes to exiting their businesses—whether it’s a transition to management, an ESOP or a third-party sale—too many entrepreneurs take the former approach. They wait until just prior to exit to address the issues that will diminish the chance of attaining maximum value. It’s certainly not a bad thing to do, but is it the best way to do it?

Simply, no.

Much like smart home sellers, smart business sellers always are on the lookout for issues and problems in their businesses and make the improvements and enhancements—read: investments—to realize maximum value now. Their mind-set is that their business is for sale today, tomorrow, every day.

It’s not a complex idea, yet it isn’t put in practice nearly often enough.

Good Intentions Aren’t a Business Strategy

When queried about why they chose not to address fundamental business issues before a sale, many business owners provide a surprisingly common rationale: Every business has problems. I was too busy growing my business to pay attention to issues that weren’t generating revenue.

Good logic? Seems to be—at least on the surface. It’s true, all businesses have issues. Even the most-admired ones—the Apples, Amazons and Disneys. It’s also difficult to take resources away from revenue-generating activities.

But it’s flawed logic. It’s short-term focused. It doesn’t reflect business sustainability or long-term value. And even though the intention is good—generating revenue—the short-term mind-set can harm revenue growth now and in the future, which ultimately has a valuation impact.

The fact is, business issues or problems that have the capacity to affect a sale price in the future, are likely significant enough to affect revenue growth now. So, your laser focus on revenue-generating activities, at least in part, is an effort to compensate for revenue being lost to a nagging business problem.

The smart business sellers are preparing for exit today as if their business were already for sale, even though exit may be years away.

The Succession Factor

Not surprisingly, the same notion applies to succession. A successful exit—meaning, the way you want the exit to happen—relies on the execution of a thoughtful succession plan, ensuring that the succeeding owner(s) and senior leadership are solidly in place.

The same business issues or problems that ultimately affect valuation can also affect succession. Any ownership/transition reflecting any type of exit transaction is subject to the profitability and sustainability of the business and can be compromised by unaddressed issues.

 What’s Important?

There are three areas that can have an outsized effect on an exit transaction and succession:

• Sales/Marketing
• Operations
• Finance/Accounting

Sure, sales and marketing drive revenue. But are the sales and marketing teams optimally staffed and organized to drive maximum revenue? What are their channels and methods for attracting customers? Is there a cross-selling component across product lines? Are your competitive differences well-defined and are they being well-communicated in the marketplace?

Sales and particularly recurring sales rely on a solid operational infrastructure, which includes the customer service and IT organizations. Are customers satisfied with your product or service? How do you know? Do they have to wait minutes or is it weeks to get help with an issue or a response to a question? And is your “proprietary” processing system truly state-of-the-art or is it bandaged together and prone to inopportune failure?

The base layer of these functions lies in finance and accounting. But are your financials credible? What’s the quality of your earnings? Are your financial statements loaded with personal expenses? Are your customers paying on time or are you essentially in the credit business, accepting invoice payments months late? Critically important, can you pinpoint your cash flow at any time during the month?

A word on culture. Often over-looked as a “soft” issue, a poor company culture can tank a transaction or a succession plan with surprising ease. Dissatisfied or cynical employees are a stage 4 business cancer that spreads quickly if not addressed.

Do your employees understand and are they engaged in the business strategy? Again, how do you know? Do they genuinely care about your customers and their satisfaction? What is your employee turnover rate? Why?

Making it a Strategic Initiative

Many issues are easy to identify. A failing IT system is easy to diagnose, as is a 94-minute customer inquiry queue. Other issues are less conspicuous and take honest introspection to identify. Despite our good intentions, however, the most effective and insightful process involves annual strategic planning.

A genuine and robust annual strategic planning process is a long-term value generator. Here, genuine means process-based with appropriate oversight, ideally from an independent board of directors that demands accountability for plan achievement.

The strategic planning process should include a SWOT (strengths / weaknesses / opportunities / threats) that is introspective enough to identify the business issues that threaten achievement of the plan, which will invariably be the issues that interfere with exit and succession planning. With respect to accountability, the strategy should identify a plan for correcting weaknesses and ensuring its timely execution.

Independent outside resources can be enormously helpful in various aspects of strategic planning—facilitating a fair yet meaningful SWOT analysis, conducting a quality of earnings analysis and even evaluating company culture. The right service professionals with multi-disciplinary skill sets and open minds can be worth their weight in gold.

Good intentions only go so far. They played a role in getting you to $20 million in revenue, but they won’t get you from $80 to $100 million, much less ensure that you’re getting maximum value at exit. That takes a long-term view, a multi-disciplinary team you can trust and a bias to fix problems as they arise along the way.

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