“Creating Successful Transitions Series”
by Stephen Ferraro, CPA/ABV/CFF, CVA, CEBC, MAFF
It has been said that “timing is everything”. Well as far as business growth and exit planning goes, “timing” is one of the most important elements of your overall plan. This article is intended to provide you with some guidance as to how you can begin to design a successful growth and exit plan no matter if your exit is near or many years into the future.
Gaining an Exit Perspective
Setting a plan for an exit requires a perspective on what you are trying to achieve and when it is possible to attain such an outcome. An important consideration for every business owner is that of “exit windows”, or, how to time your exit to meet your business and personal goals. In fact, there are three (3) components of “readiness” to a well-developed growth and exit plan – they are:
- Personal Readiness
- Company Readiness
- Market Readiness
This article focuses on market readiness, with heavy consideration given to company and personal readiness to help you gain an “exit perspective”.
Once you understand the timing of your exit, there is an opportunity for you to begin planning and making decisions today based upon achieving this future exit. Without this type of planning, you are likely to be without direction for your exit, and possibly missing the next exit window.
Exit Windows – Market Readiness
The chart below illustrates the cycle of business that exists over the past 40 years and shows that our current market, which has been impacted by COVID-19. And, depending on your industry, it may not be the ideal time for your business exit. According to the “U.S. Ten Year Private Transfer Cycle” chart below, in 2020 we were already outside the Prime Selling Time and into the land of market uncertainty. And, the pandemic has certainly “sealed the deal” on uncertainty.
–Rob Slee, Private Capital Markets
Past performance of markets is not necessarily a perfect predictor of the future. However, as the chart indicates, the last four (4) decades have followed a similar pattern of economic growth, expansion and then retraction/recession.
Setting a proper growth and/or exit plan begins with the end in mind. And, if time permits, you can think about growing into your future exit. It helps to understand when you would like to exit and then build the business growth and exit plan around that timing.
Three (3) Concepts Relating to Timing of Growth and Exit Planning
In order to manage anything in life and in business, you need to be able to measure it. Measuring your personal, company and market readiness can set a solid foundation for your growth and exit plans and be a large determinate as to whether you will be able to grow into your eventual exit or if you should consider an exit earlier than perhaps originally planned.
1. Personal Readiness
Growth and exit planning for private businesses large revolves around what an owner wants to personally accomplish. Some owners want to be worth $10 million (or $100 million). Other owners want to have personal freedoms to achieve balance in their lives – that is their priority. Others just live to perfect their craft and design income and businesses around that passion. No matter what your personal goals are, you are well served understanding what stage you are at in terms of personal readiness for an exit. That will be the largest determinate of whether you want to undertake the next level of growth in your business.
2. Company Readiness
Is your business set up today to be run by someone else? This is an important measurement of company readiness. Many privately-held business owners are personally involved in many, many aspects of their businesses. These companies are likely not ready for a transition because they cannot function without the owner. Other areas of company readiness include financials, systems, management, operations, and many other “value drivers” that determine a businesses’ readiness for a transition. Growing into your eventual exit may include increasing your company readiness to prepare your business for another owner.
3. Market Readiness
Market readiness was discussed above, and, depending on your industry, today’s market may not be ripe for transactions and exits. The overall economy is uncertain, your business cash flows may be uncertain, financing for transactions may not be available and company valuations may have peaked. Market readiness is a large factor in “growing into your exit” because you may determine that now is not the time to exit and you want to establish a growth plan to capture the opportunities of a future and more vibrant market.
In conclusion, if you know that your exit window can extend beyond the next recession, then holding onto your business and growing into a future exit may make a lot of sense. However, if you don’t want to hold onto your business through the next recession, then thinking about an exit plan (that includes a growth plan) can also make sense today.
Bottom line…you should always run your business with your exit in mind, focusing on company and personal readiness as well. In this way, you can increase the likelihood of meeting your exit goals, which have been measured as a part of your total exit and business transition planning.
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.