4 Essential Exit Planning Basics

By Generational Equity


Exit planning is like many other business functions: There is an optimal way to do it and a less-than-desirable way. Far too often, because of a lack of knowledge about the M&A process, we find that business owners choose the latter more than the former. This is one reason why we hold exit planning conferences throughout North America. By learning some basics about how to exit, you can preserve your legacy for years to come.

And the good news is that there are some straightforward concepts that will allow you to exit your business for maximum value if you follow them. Here are the key ones we have learned over the years:

  • Start building a buyer ready business from day one
  • Before you decide to exit, determine your true company valuation
  • Once you have a business enterprise value (BEV) for your company, create documents to highlight your opportunity to buyers
  • Finally, create an auction so buyers will be bidding against one another for your company

As you can tell, I have outlined these in roughly the order you should approach them in your exit planning process.

Building a Buyer Ready Business

So how do you build a buyer ready business? Simply approach the operation of your company with one goal in mind: How do I grow this business so that buyers will find it attractive in the future? Over the years of talking with hundreds of buyers, we believe there are two fundamental areas to focus on when creating an attractive company for buyers. You need to reduce risk by minimizing both owner dependence and customer concentration.

If you make 100% of the major decisions and have not developed a capable middle-management team, buyers will be concerned. Likewise, if a significant portion of your revenue is generated by a limited pool of clients, buyers will take notice. Worse yet, if these client relationships are all dependent on you, it really could be a problem for buyers.

Grow your business with this end game in mind, and focus on reducing risk associated with you and your client base.

Determining Your Company Valuation

Next, what is your business worth and how does that relate to how much you need/want at exit? The two go hand in hand. Sadly, most business owners have no idea what their companies are worth. They think they might, using some rudimentary industry standard formula, but the reality is that is not the most accurate method in many cases.

This is why it is vital to hire an M&A advisory firm early on to value your business and provide you with ideas on how to grow it to match your financial needs. You can’t decide when to sell until you know the value of your business today.

Document, Document, Document

Once you know your company’s value and you have decided that now is the time to put your exit plan into action, it is vital to create documentation that accurately highlights where your company has been and more importantly, where it is going.

The first step is telling your company’s story, documenting the past, and projecting the future using facts, reliable forecasts and projections. One key point: If your company has grown 5% annually for the past 10 years, avoid the hockey stick forecast that has you doubling that every year going forward. Buyers want reality, so should you.

Auction Your Business to Buyers

Finally, once your documentation is in place, you need to try to get as many buyers interested in the business as possible. The auction process can be a daunting and demanding aspect of exit planning. Again, having a professional firm on your side can really help.

Keeping multiple buyers in hand, interested, and motivated is a specialty that Generational Equity dealmakers concentrate on. This is probably why no lower middle-market M&A firm has sold more companies in the past 10 years or so. Our process is designed to optimize the return our clients have invested in their companies.

Unfortunately, time and space do not allow me to expand on these four principles further, nor to add in the many others that exist. You will learn more by attending a Generational Equity exit planning conference in your area soon. These highly educational meetings are complimentary and designed to help you quickly learn all the basics you need for effective exit planning.

To find out when we will be in your area next, contact us or visit our conference page and look up our pending locations near you.

And be sure to follow the four basics outlined in this article to optimize your return on investment.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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