Consider ABC Company, a hypothetical middle-market supplier of plumbing equipment to commercial contractors. This family-owned business was founded 70 years ago and is now in its third generation of leadership. The current President and CEO is in his middle 60s. He started in the stock room as a teenager and ascended the ladder to eventually assume leadership when his father retired in the 1980s.
Now, he’s looking ahead to the next phase of his life and hoping it includes travel, quality time with the grandkids, maybe a little golf and definitely some well-earned downtime. He has two grown children currently in the business, and two unrelated officers with their eyes on the top spot. Revenues are steady, but not necessarily growing at an appreciable rate. The business is cyclical, certainly not recession-proof, and prone to market variances of many origins.
ABC Company cannot simply maintain the status quo and hope to survive into the foreseeable future. It must grow in ways that diversify its product offerings, expand its customer base, and mitigate risk during downturns. This necessitates investment, which in turn, involves debt. Knowing this, the current owner has some decisions to make:
- Does he want to incur additional debt – and the corresponding risk that comes with it – at this stage in his life?
- How do he and his team plan to pursue growth? If they haven’t adequately planned for it yet, how and when will that occur?
- What’s his preferred exit strategy from a transactional standpoint—family transition, management buyout, employee stock ownership plan (ESOP), third-party sale, recapitalization, or perhaps even an orderly liquidation?
- If he wants to keep the business in family hands, which child should take over, and why? How will he manage reaction from the officers, each of whom seeks to take the reins themselves?
There are other questions, of course. Lots of questions. But answers to any and all questions related to business transition are predicated on one variable: value.
At Skoda Minotti, we position Identify Value as our first of five steps so that you as a business owner have a baseline measurement from which to track value over time. As you endeavor to Build Value (watch for a future blog on this topic), you can use this baseline to revalue your business based on your success.
Exit planning is business strategy.
This tenet applies to all stages of value maturity—particularly the first stage of Identifying Value. We preach it constantly because it makes sense on so many levels. Exit planning is all about building a management system to keep the organization focused on building value that one day can be extracted, harvested and monetized. Think about it: 80 to 90 percent of most business owners’ net worth is tied up in their business; if you have a financial advisor helping you meet your retirement goals, why wouldn’t you seek to enhance and maximize such an outsized share of your net worth through the help of a Certified Exit Planning Advisor (CEPA)?
It seems logical. Yet the numbers suggest otherwise. Fifty-six percent of business owners say they know the value of their business—yet only 18 percent have had that business formally valued by a valuation expert in the last two years1. Getting an accurate read on the value of one’s business is crucial for estate planning purposes, as well as planning accurately for a post-exit lifestyle, and addressing all of the relevant questions that surround business transitions.
In pursuing valuation, you may find, for example, that the business you thought was worth $4 million is actually worth $2 million. Suddenly, the windfall that you hoped would fund your post-exit life at a certain level is smaller than you anticipated. While the news may or may not be good, getting an accurate gauge on value at least allows you to make informed decisions. Should you continue to run the business until its value increases? Reposition the business to pursue new channels and opportunities for growth? Make other adjustments necessary to build its value over some period of time? Adjust your own post-exit expectations?
The choices are yours to make, but far too many owners view their businesses based on their feelings about what they think is important. Instead, they – and you – should start thinking about how potential buyers view businesses. Thinking like a buyer will better help prepare your business for sale by reducing risks buyers might uncover. Knowing the true value of your business is also the first step toward driving organizational behavior accordingly, connecting business priorities to value, and ultimately, moving in the right direction. Remember…
Exit planning is business strategy.
Identify Value – Questions to Ask, and Process We Undertake Together
When we at Skoda Minotti work with business owners at the front end of their value maturity journey, we begin by asking them to ask themselves fundamental questions:
- What’s the goal?
- What’s next?
- How much do I need?
- How much will the business contribute?
From there, we undertake a Business Attractiveness Assessment and Exit Planning Readiness Assessment. These assessments are exhaustive in their breadth and depth, encompassing 150 questions—including employee and management issues, management systems and forecasts, company documentation, product strategies and scoring personal, financial and business value factors.
Through this process of dual-phase assessment, we are able to correlate assessments to the financial analysis to determine the range of value—specifically manifested through two scores: (1) an attractiveness score, and (2) a readiness score. These two scores encompass deliverables that include a specific and qualified list of personal, financial and business strengths and weaknesses; present and potential values; and prioritized action plans.
Two final notes about Identify Value:
- Many business owners maintain a laundry list of initiatives they believe will take their business to the next level. However, the same excuses always arise as to why those initiatives are never implemented—and those excuses usually tie back to the daily demands of running a business. Our process is proven to help owners prioritize and determine an integration plan to make their initiatives a reality.
- At Skoda Minotti, we recommend that businesses be valued annually. This delivers the most accurate, up-to-date picture of a business’ health and value, which of course, enables decisions to be made that are based on the latest information. It should be noted that subsequent valuations are less costly than the first, since the template has already been established.