For many business owners, an exit plan feels like something to think about “someday.”
Maybe retirement is still years away. Maybe you plan to sell the business eventually. Maybe you hope a family member or employee will take over. Or perhaps you simply want to know that you could step away if the right opportunity came along.
Whatever your plans, one thing is certain:
The best time to prepare your business for an owner's exit is before you need to exit.
An effective exit plan isn't just about deciding who will take over or what the business might sell for. It's about building a company that is financially strong, operationally sound, and capable of succeeding without the owner at the center of every decision.
What Happens If the Business Depends Too Much on You?
Many successful business owners are deeply involved in their companies. They know their customers, employees, vendors and operations. They make the important decisions and often serve as the person everyone turns to when something needs to be resolved.
That may work well while you're running the business.
But it can create a challenge when you're ready to step away.
A prospective buyer, successor or family member may ask:
- Can the business operate without the owner?
- Are the financials accurate and easy to understand?
- Are revenue and profits sustainable?
- Which products, services or customers are most profitable?
- Are key relationships tied to the owner personally?
- Are there documented processes and systems?
- Does the management team have the experience to run the company?
- What would the business be worth today?
If the answers aren't clear, the business may be less prepared for an ownership transition than you think.
Know What Your Business Is Really Worth
One of the most important parts of exit planning is understanding the financial health and value of the business.
That starts with more than looking at annual revenue.
Revenue tells you how much business you're doing. Profitability tells you how effectively you're turning that business into value.
Business owners should have a clear understanding of:
- Profitability by product or product line
- Profitability by service
- Customer or customer-segment profitability
- Gross and net margins
- Cash flow
- Operating expenses
- Recurring versus one-time revenue
- Outstanding debt and obligations
- Key financial trends
- Future financial performance
If you don't have visibility into these areas, it can be difficult to make good decisions today and even more difficult to demonstrate the value of your business when you're ready to transition.
Don't Let Revenue Hide the Real Story
A company can generate significant revenue and still have profitability problems.
Perhaps one product line generates substantial sales but very little margin. Maybe a major customer requires so many resources that the relationship isn't as profitable as it appears. Or perhaps the business has grown, but overhead has grown just as quickly.
These issues can be especially important when preparing for an ownership transition.
A buyer or successor isn't simply purchasing your revenue.
They're investing in the future earning potential of the business.
Understanding what's actually profitable can help you identify areas that need attention before you begin the exit process.
Build a Business That Doesn't Depend on One Person
A strong exit plan also means creating a business that can function without the owner.
That may require:
Documenting key processes.
Important knowledge shouldn't live exclusively in the owner's head.
Developing leadership.
Identify and develop people who can take on greater responsibility.
Strengthening financial reporting.
Management should have timely, accurate information to make decisions.
Clarifying responsibilities.
The organization should know who owns important decisions and processes.
Reducing owner dependency.
Customer relationships, vendor relationships and operational knowledge should not depend entirely on one person.
The goal isn't to make the owner irrelevant.
It's to make the business transferable.
Start Fixing Problems Before You're Ready to Sell
One of the biggest advantages of starting early is having time to address weaknesses.
If profitability is inconsistent, there is time to improve it.
If financial reporting is inadequate, there is time to build better reporting.
If certain products or services aren't producing acceptable margins, there is time to evaluate pricing, costs or whether they belong in the business at all.
If the management team needs development, there is time to build that team.
And if the business relies heavily on the owner, there is time to gradually transfer responsibilities.
Exit planning shouldn't be a fire drill.
The earlier you begin, the more options you have.
Your Exit Plan Should Start With Your Business Today
You may not know exactly when you'll exit.
That's okay.
You don't need to have a buyer, successor or specific transition date identified to begin preparing.
Start by asking:
Do I know what is truly profitable?
Do I understand my cash flow and financial trends?
Could my business operate effectively if I stepped away for 30, 60 or 90 days?
Are my processes documented?
Do I have people who can take on my responsibilities?
Would a potential buyer understand the financial story of my business?
If the answer to several of these questions is no, that doesn't mean your business isn't ready for an eventual transition.
It means you have an opportunity to make it stronger.
A Fractional CFO Can Help You Prepare
You don't necessarily need a full-time CFO to begin preparing your business for an eventual ownership transition.
A Fractional CFO can provide experienced financial leadership and help you take a closer look at the areas that matter most including profitability, cash flow, forecasting, financial reporting, budgeting and strategic decision-making.
More importantly, a Fractional CFO can serve as a second set of eyes on the business, helping identify financial questions and opportunities that may be difficult to see when you're focused on running the day-to-day operation.
The goal isn't simply to prepare a business to sell.
It's to build a stronger business today that gives you more options tomorrow.
Start Before You Need To
Your exit may be five years away. It may be ten years away. Or your plans may change entirely.
Preparing now still has value.
Because a business with strong financial visibility, healthy profitability, documented processes, capable leadership and less dependence on its owner is generally better positioned for whatever comes next.
Your exit plan starts long before your exit.
If you're a business owner wondering what your company needs to do to become more financially prepared for an eventual transition, The Phoenix Group can help you take a closer look at the numbers, identify opportunities and build a stronger financial foundation.
Know your numbers. Strengthen your business. Create more options for your future.
Schedule a complimentary consultation with The Phoenix Group today.