Prioritizing Value Drivers in Your Exit Strategy
One of my clients wants to sell her business and retire in 10 years. She completed our online Owner Planning Checklist which got her thinking about next steps. Since then, she has chosen her exit date, thinks she’d like to sell to an outside, third party, and has documented foundational information about her company and exit plan. She has assessed her company’s current value – both internally and by obtaining a Quality of Earnings Report – and has determined what it must be worth when she exits in order to meet the financial objectives that will enable her to provide for her family and live the life she envisions after retirement. The gap amount between the two values is the basis of the
exit strategy we’ve developed to reach that ultimate value goal.
Now the process begins to execute that strategy. The exit plan will involve optimizing her company’s value drivers – business systems that generate either recurring revenue or financial efficiencies from an established, growing customer base and those internally controlled activities, capabilities, or qualities that add worth to the company. Enhancing the performance of the business in these key areas will increase profitability, reduce risk, and ensure the sustainability and growth of her business, which will help her get top dollar when she sells.
One of her first questions at this step of the process is one I’ve been asked many times: “How do I know which value drivers to focus on first?”
Value drivers can vary from company to company and an exit strategist can help you pinpoint those that impact your business. The top ten value drivers that are applicable to many, if not most, companies include:
- Stable, high-performing workforce and motivated management
- Documented systems that sustain the growth of the business
- An established, diverse, customer base
- A facility that is consistent with the asking price in terms of its appearance, condition, technology, equipment, and organization
- A realistic growth strategy
- Effective, documented financial controls
- A good business overview in terms of audits, bank relationships, etc.
- A solid financial structure in terms of growth, cash flow, profitability, revenue, and debt
- Attractive business sector including a positive standing within the industry and diversity of industry sectors served
- Protected technology and intellectual property
There are various approaches to optimizing value drivers and, in any case, it’s a multi-year process. I sometimes advise business owners to address those that are easiest to tackle, make the improvements needed and mark those off the list, except for periodic check-ups. Other value drivers will need constant attention, monitoring, and adjustments over the long haul.
For some companies, it works to start at the beginning of the top ten list. Most often, as I advised in this case, it’s wise to prioritize which value drivers need work by determining which are working and why, and which are not working and why not. We’ll start with a review of the top two priorities for this client’s situation, which happen to be numbers 1 and 2 on the list.
As you assess each value driver, consider the elements that influence the performance of that value driver, from both a qualitative and quantitative perspective. Then develop an action plan to address shortfalls.
Value Driver #1: Stable High Performing Workforce
As a general rule, workforce is the number one value driver. A company’s people are the heart of an organization. Take these steps and ask yourself some questions to assess your workforce.
- Prepare a list of all your employees in key positions, by years of service.
- Calculate your employee turnover each year for the last three years.
- Determine the amount given in raises to each employee in the last three years and whether the raise was based on merit or some type of outside influence.
- Who on the list would be the hardest to replace why? When I was in public accounting and had more than 30 employees, I was always thanking God for one or two of them.
- Assess the knowledge, skills, experience, training, and creative abilities employees bring to the business.
- Assess management talent.
- Do any employees exemplify ownership thinking? Have you introduced ownership thinking into the culture of your business?
- What is your company’s growth potential?
- If the company is to be sold, is it owner-centric or dependent?
- Do you have:
- A “golden-handcuffs” plan for long term compensation and retention?
- A bonus system that works for your company?
- An engaged and well–trained workforce?
- Depth and diversity of workforce?
- Articulated purpose, core values, and BHAGs?
- For key employees – non-compete agreements, stay bonuses?
- A healthy company culture?
Value Driver #2: Sustainable, Documented System
It’s important that your business is built on a solid structure, with systems in place that will sustain its growth. These systems, processes, and applicable metrics must be documented. Depending on the size of your organization you may need to work on this value driver over the long-term.
First, determine whether you have the right processes and documentation in place for these key sectors of your business:
- Human resources: recruitment, retention, employee manual, communications
- Sales and marketing including tracking
- Sales including strategies to increase sales
- Service delivery
Next, ask yourself some key questions to ensure your organization is functioning optimally:
- Have you defined the key positions in your organization?
- Do you have written job descriptions for each position? You may wish to consider starting out by having each employee write their own job description and document their activities, then have them reviewed and edited for consistency of formatting and content.
- Is there any part of your system that is outdated? Should it be replaced? At what cost?
In future blogs, I’ll address the remaining value drivers on the “top ten” list. In the meantime, complete our easy, online Exit Planning Assessment and Value Driver Analysis. Then contact me to schedule a
complimentary review of your assessments or to discuss how I can help you start developing your own exit strategy.
Visit our website to learn more about our Exit Planning Peer Advisory Board.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give
advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.