If you've ever considered exit planning, you must build strategies that cover where and how to start, what to analyze and review for your business, and how to plan toward transition. The first step in business succession is building the most value you can for your business, a time to consider all aspects of your business and determine where opportunities of value lie.
What Is Business Value, And How Do You Calculate It?
Business value is considered and measured as the well-being and health of a business. It sums up all business aspects directly affecting the valuation, including drawbacks hindering the company's progress.
Calculating Business Value
Business Value = total sum of tangible (monetary assets, stockholder equity, fixtures, and utility) and intangible assets (brand, recognition, goodwill, public benefit, and trademarks) - liabilities (debts, commercial mortgage, capita equipment bank loans).
Before we get into exit planning, let's take a step back and understand some basics.
What Is A Value Gap?
You can consider the difference between the current value of a business and the potential value. Understanding a value gap allows for successful exiting planning by building value and meeting your desired goal.
What Is Exit Planning?
As a process that results in building and implementing a strategy, it allows you to exit your business on your own terms and conditions. Exit planning establishes a roadmap that includes business value creation targets, the process that will help achieve financial gains and limit losses, how you intend to exit, and all steps that need to take place to do so successfully. Many small businesses like yours fail to plan for an exit, resulting in missed value opportunities and non-optimal exits.
How Does Exit Planning Work When Building Business Value?
Exit planning works as a contingency strategy to prepare your business for sale or transition to new management. Still, it also comes in handy when unexpected changes in the market occur. Examples are litigation, divorce, estate planning, retirement, and even catastrophic events.
As you can see, your business value depends heavily on exit planning.
Achieving lasting, transferable value in your business depends on how efficiently you close the Value Gap. You must follow steps and set them as a framework for building sustainable value.
Building Business Value In 5 Steps
Okay, so let's make this simple for you, when you began business, you started with a business plan, but what about an exit plan? Now you've gained a different perspective.
To ensure a successful exit plan, there are steps every business owner should follow. The beginning step in this process is to identify objectives. Business and personal financial resources must align with goals to create a comprehensive plan.
Step 1 - Pinpoint Your Objectives: When, Who, and How Much
Defining and measuring issues supports a baseline value for your business. By implementing a financial needs analysis and establishing value creation goals, you determine what needs to happen to exit successfully.
Your exit plan should consider three objectives:
Timing To Sell/Exit? When you sell or exit will often change, mostly due to unanticipated events. For instance, the most recent global pandemic and economic recession can change the timing of selling your business.
Who You Sell or Transition To? Common options are family members, insiders like your management team, strategic buyers, or even competitors. They are the better choice to continue running and managing your business. Pro-Tip: When choosing the entity to sell to, align your objectives with those of the potential buyer.
How Much To Sell Your Business For? Knowing how much to sell your business will only come easily if you know how much it's worth. You can evaluate your company in many ways, such as using a multiple of EBITDA, seller discretionary expenses, or based on cash flow.