“Creating Successful Transition Series”
by Stephen Ferraro, CPA/ABV/CFF, CVA, CEBC, MAFF
As the owner of a privately held business, the majority of your net worth is likely tied to the value of the privately held business that you own. If most of your wealth is inside of your business, then you are likely interested in (1) increasing the value of your business, and (2) doing so in a manner that allows you to monetize that value of that business in the future. This article is written to educate owners on both the Growth Planning process, as well as the Exit Planning process and to compare these two complementary services to raise your awareness of what is available to you regarding your largest asset.
Why Planning is So Important to Growth or Exit
There are many areas in life that strongly recommend / require advanced planning before making important decisions. One area is in dealing with an estate – the “estate planning” process is largely about analyzing estate assets and thinking through tax consequences and inheritance / philanthropic desires before taking action. Estate planning comes before the documentation of the future estate transfer so that complex issues are understood and planned for in accordance with your wishes.
Another area where planning comes before acting is investment management. Typically, before putting together a portfolio of investments, a planning process is undertaken that includes measuring your risk tolerance, an education of investments and an overall plan for how communications will function to see if the investment plan is meeting your needs. So, again, financial planning often comes before the actual placement of investments.
So, given that your business may be your largest asset, it likely makes sense that some level of planning is done before a growth or exit strategy is attempted to be executed.
What Growth and Exit Planning Have in Common
Growth planning is about increasing the size and value of your business. Exit Planning is about extracting the value that you’ve created from your business. Both forms of planning are available to business owners to assist with navigating the complexity that comes with each.
Both growth planning and exit planning follow a process. Growth planning is about figuring out which areas of your business – i.e. the value drivers – should be prioritized and addressed ahead of other areas. As the saying goes, one should not try to “boil the ocean” when attempting to grow your business.
Growth Planning is Inclusive
If an owner believes that they can only act on one thing at a time, one approach to growing a business is to work on one thing today that will help you grow the value of your business. But how do you know how that one thing impacts the other areas of your business or if that one thing is the best thing to start with?
Another approach to Growth Planning is to “architect” an overall design / blueprint for the growth of your business and develop strategies that have different parts of the business interact and work together, similar to the way that chess pieces work together on a chess board. The skilled chess player only makes one move at a time but understands how the strength and ability of one move interacts with the future moves of the other pieces.
For example, one cannot only focus on sales because operations need to be in place to support the extra business that sales will generate. Then human resources needs to hire the right people and finance needs to support the additional volume. Of course, marketing needs to consistently support sales and innovation is needed to keep your business relevant over the longer-term.
Owners need to know what their chess board looks like and what moves to make first and how those decisions impact future decisions. For this reason, we say that the Growth Planning Process is Inclusive – it involves all parts of your business, how they can best work together, and which areas should be addressed first.
Exit Planning is an “Exclusive” Process
In contrast to growth planning, exit planning is “exclusive” because it focuses on learning about all of the exit options that are available to you so that you can determine which one best fits your business and personal goals. The exit planning process is one of “elimination” whereby owners learn about all of the options that are available to them before choosing the single one (or sometimes a combination of two options) that will work best for them.
Creating Architecture for the Next Level or Designing an Exit Path for a New Owner
To summarize, Growth Planning is about architecture – creating a blueprint that will engineer and support the next level of growth for your business. But exit planning is a realization that the next level of growth is not something that you want to achieve – it’s better to find another owner and either sell the business to them or help them with their blueprint for your business.
Only you, the business owner, can choose whether you are ready to “hold and grow” or “sell and go”. A growth plan will help you map out the next level of growth and attempt to budget for the time, resources and commitment needed to get to that next level. Whereas an exit plan will help put you on a path to bringing in someone else to take the business that you’ve created to the next level.
Whether you are interested in a strategic business valuation, growth plan or an exit plan, feel free to reach out to our team and we will be glad to have an initial conversation with you about these useful forms of advanced planning.