Let’s Get Real: Exit Planning’s Bad Rap
One thing I’ve learned since becoming a Certified Exit Planning Advisor (CEPA®) and starting to incorporate that language into our growth strategy consulting practice is that nobody likes the term “Exit Planning.”
Here’s what I hear all the time:
“I’m not planning to sell my business yet. I don’t need to worry about Exit Planning.”
“Exit Planning is unnecessary because I’m young and not likely to die soon.”
“Exit Planning is simply depressing. I don’t want to think about it.”
There’s a common misconception that Exit Planning is just about selling your business, or what happens if you die and need a succession plan. Those might be elements of it, but there’s so much more to Exit Planning. In fact: Exit Planning is a present tense strategy to maximize the value of the business at the time of exit to help the owner achieve their personal and financial goals.
Did you catch that part about maximizing the value of the business? That’s what drew me to Exit Planning in the first place.
The Reality Check
As a fractional COO and management consultant for many years, my mission has always been to help business owners make their businesses bigger, better, and more profitable. What I’ve learned over those years is that, especially for small and mid-sized business owners, so much of the business is intertwined with their identities and personal lives. Measuring success purely by revenue or earnings alone was incomplete.
Going back to the definition of exit planning, it makes the point about maximizing value and helping owners achieve personal and financial goals. That right there is the bigger picture.
Quick detour into how business value is calculated – the layman’s 20 second version. Business value is a multiple of earnings (EBITDA). That multiple exists on a scale that’s capped on either end, generally by the norms of the industry that business is in, for example 1X – 9X. There’s a bell curve with most businesses falling in the 45%-67% score range for attractiveness and readiness.
So, if your business is “better” or more attractive than 45% of the others in your industry and you have $750,000 in earnings, your valuation might come back at $2M. (Stay with me here, just a tiny bit more math.)
Let’s say you improved how your business ran, using the 3 principles of Value Creation (EGR, aka “eager”) – Improved Earnings, More Growth, Reduced Risk. Your company not only became more attractive than 65% of the competitors in the industry but now you’re running at $1,000,000 in earnings. Doing the math… wow, you could be at $5M for your valuation.
That is the definition of Value Creation.
What does the difference between $2M and $5M mean to you and your goals?
A New Perspective
Now that we’ve dug into what Exit Planning really means, let’s rephrase those first complaints by substituting “Value Creation.”
“I’m not planning to sell my business yet. I don’t need to worry about Value Creation.”
“Value Creation is unnecessary because I’m young and not likely to die soon.”
“Value Creation is simply depressing. I don’t want to think about it.”
Maybe these objections deserve rethinking. 😉
BizOps Solved works with business owners to make their companies more valuable and their lives better.