Exit planning, a crucial aspect of business strategy, is often overlooked by many business owners. It's essential to understand that exit planning is not a one-size-fits-all approach; it varies depending on the business, the owner's goals, and the potential buyer's needs. A universal exit planning framework ensures successful and meaningful business exits.
Case Study: OldCo/NewCo Transition Strategy
One intriguing exit strategy is the OldCo/NewCo business transition. This approach is beneficial when a business owner wants to sell their business to a key employee but needs help with the employee's financial limitations in buying the company outright.
In the case study, John, the business owner, aimed to exit his business in five years, seeking to withdraw substantial equity and reduce his involvement without compromising the business's stability. The strategy involved creating a new company (NewCo) for future business while the existing one (OldCo) completed ongoing projects. This method allowed John to smoothly transition out of the business while retaining some revenue during the process.
The Value Acceleration Methodology played a significant role in this exit. By integrating his personal exit goals into the business plan, John could achieve the desired exit within their preferred time frame.
To effectively implement this methodology, business owners should:
Create a Process: Define and order activities, assign roles and responsibilities, and ensure everyone understands their part in the business's operation and value creation. This step is crucial for differentiating essential activities from non-essential ones and avoiding chaos and random actions.
Utilize Professional Advisors: Engage with a community of professional advisors to maximize business value. It may involve rigorous research, studying, certification, and using proven techniques to measure actual value based on defined drivers, ensuring focused value growth.
Integrate Corporate Strategy: Align goals, improve economic efficiencies, and transition to an enterprise value mindset. This strategic integration is critical to being ready for an exit, increasing annual income, and having a contingency plan.
The Impact of the Value Acceleration Methodology
The Value Acceleration Methodology mitigates risks that can impact an exit. These risks can be associated with the business, the owner's personal life, or financial concerns. Preparing for these risks is a crucial step in ensuring a smooth transition.
Selling to a Third Party
Another popular exit option is selling the business to a third-party buyer. This approach is often pursued for its potential to maximize financial return and allow a clean break from the company. For example, the owner of D&R Cosmetics, with the guidance of a Certified Exit Planning Advisor (CEPA), successfully navigated this path. The Value Acceleration Methodology was instrumental in this process. It provided a transparent, structured framework that helped accurately assess the business's value, prepare it for sale, and strategically align all advisors and stakeholders. This alignment was crucial for understanding the business's current state and future potential, thereby facilitating a more informed and lucrative sale. The methodology also ensured that the company was presented attractively to potential buyers, highlighting its strengths and opportunities, which is essential in a competitive market.
Transitioning a Family Business to the Next Generation
Transitioning a family business to the next generation presents unique challenges. Studies show that only 30% of family-owned companies last until the second generation, and even fewer, 12%, make it to the third generation. In these scenarios, the Value Acceleration Methodology can be particularly beneficial. It prepares the business for a smoother transition to a well-informed successor.
Embracing Exit Planning as a Business Strategy
Exit planning should be an integral part of a business strategy. Whether transitioning to a key employee, selling to a third party, or passing it on to the next generation in a family business, a well-thought-out exit plan ensures the longevity and sustainability of the company and the owner's future. By embracing a tailored exit planning approach, business owners can provide a successful and profitable exit from their business ventures.
For more assistance implementing the Value Acceleration Methodology, please get in touch with us for a free consultation. Remember to subscribe to our newsletter for more information on the current market conditions and resources for your toolkit.