There comes a time when it’s time to leave a business, whether because you’re ready for something new or you’ve done what you set out to do and your work is complete. Or perhaps there’s another reason why it’s time to say goodbye and exit gracefully. Regardless of the reason, having an exit plan is crucial. And the time to develop your exit plan is not when you’re ready to exit, but from the very start.
I’ve done this, and I speak from a place of experience. By focusing on three business improvement themes that resulted from our exit planning process, we achieved a 83X return on investment in only 63 months. Read on to learn how I did it, and you can too.
Begin with the end in mind
At the age of 43; I realized my dream of owning a company. Yet I started out my ownership thinking as much about my goals as I did my exit plan. I’m a big Stephen R. Covey fan and believe in “begin with the end in mind.” So about a year into owning the company, my team and I started to develop five-year plans to dramatically increase our performance around three themes. Each of these three themes was designed to raise the multiple paid by a buyer if and when we decided to sell. And that is the point: Understanding what creates value and implementing the changes needed to drive the related improvements is exactly what you should be doing as CEO, whether or not you sell later. This is where developing an exit plan can lead to new insights about your business and later to dramatic improvements you’ll benefit from whether you sell or not.
The Value Creation Process in 4 Steps
Like me, you probably won’t start out with a goal to sell your company. However, it’s still prudent to develop an exit plan even if you never implement it, because you can dramatically improve business performance if you do so. (You can read the story about my own business and how we grew it with an exit plan in mind here.)
Warren Buffet once said, “The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.” His missive applies to strategic thinking in business planning.
So know what you’re doing. Use the following four steps that outline the process to create value by beginning with the end in mind. Note: If this looks a bit intimidating to you, or you’re not sure how to fit these additional tasks into an already crowded calendar, consider hiring a coach to facilitate a successful process.
Step 1: Where are you at right now?
- Understand where your business is in its life cycle.
- Perform an in-depth SWOT analysis on your business with your team.
- Understand what competitive advantages, resources or intellectual capital in your people you already have in place.
Step 2: Understand how much your company is currently worth
To do so, talk to your accounting or other advisors for a rough estimate. For a quick ballpark, take your pre-tax income and add back depreciation and interest to get EBITDA. Then look at expenses that may be run through the company that a buyer would not pay for (for example, a dramatically overpaid relative) and add those to EBITDA to get AEBITDA. Separate AEBITDA related to one off construction vs. annuity services/projects. Multiply the one off construction AEBITDA by 3 and the annuity AEBITDA by 7 to 9. Add those together to get your Enterprise Value. Subtract outstanding debt to arrive at an estimated net purchase value. There are many other factors but that gives you a starting ballpark.
Step 3: Understand what drives the multiple
There are four key things that drive the multiple. With that said, only one is under your control from a strategic planning process standpoint. The other three can be leveraged with high quality advisors 24 months out from a sale. Until then, the one you can control is the company attributes for multiple expansion. A few of examples of these attributes include:
- Increasing recurring/annuity revenue
- Growing the top and bottom line
- Increasing products or services in higher intellectual capital areas
- Being a market leader
- Having a customer base with limited concentration in the top 10 customers
- Having a well run company with a transparent back office that has all of the blocking and tackling operating smoothly and the scalability and geographical reach of your products.
Step 4: Keep it up
- Conduct strategic planning value creation sessions five years before exit. Take what you learned from steps 1-3 and, with your team, identify your performance gaps and growth opportunities.
- Select three to five of these that you feel have the best chance of increasing the performance of the business and also have the highest chance for implementation success.
- Remember to incorporate your current vs. future organization chart needs and gaps into your growth planning. Evaluate your people’s ability to grow with the company’s growth. The people that got you here may not be capable of taking you to where you want to go.
- Develop specific strategies for implementing the three to five themes you selected and incorporate the results into your five-year financial forecasts.
- Communicate the themes selected with your company and describe how your people fit into making this a success. Set the tone from the top of the organization.
- Review your progress monthly and hold people accountable.
- Adjust the themes, as needed based on incoming realities.
- Celebrate successes along the way!
Improving business performance and increasing value are always top of mind for CEOs. And beginning with the end in mind can help to achieve these goals by forecasting what a buyer would want to pay, then striving to make your business into that kind of tempting organization.
And if you need any assistance along the way, call on 10X CEO Coaching for help.