The value of a business determines the outcome of an exit strategy. After toiling for so many years setting up and running a business, you want to make sure you get the most value from your exit strategy. Before you can realise such success, you first have to show that the business has value. Therefore, as part of your exit planning, value building must be a top priority. This article answers the question, “How can a business add value for a successful exit strategy?”
What is an exit strategy?
An exit strategy is a business owner’s plan to sell their business to an investor, another company, or to hand it down to a successor. An exit strategy allows the business owner to focus on other ventures or retire while realising wealth from the capital value they have built. For a business owner to realise any profits, the business needs to be valuable. Therefore, an exit strategy needs to ensure that, at its conclusion, the business has the necessary value.
Understanding business value
The value of a business is seen in its success. Value, much like success, takes time to create. In most instances, value is not something you can quickly fix. As the business grows, so should its value, but it is not always the case. However, you may need to apply specific focus on increasing the value of the business as part of the exit plan as growth alone will not suffice. The reality is increasing value is not a quick fix or one-time event. It takes time and an excellent approach to manage. Therefore, it is ideal to initiate the process well before your retirement from your business.
Strategies: How can a business add value?
A healthy and profitable business is valuable. This means the profit and loss and balance sheet show the business has more profits than losses and that all other aspects of the business are in good status. There are quantifiable factors in business value, such as profits and losses. However, there are other unquantifiable qualities that cannot be reflected in your financial statements, like market reputation and employee satisfaction, that affect business value quite substantially. Transferability, and sustainability are also critical to any entity looking to buy the business.
• Organise your books
Keeping accurate records as well as accounting information and financial statements is the first step in getting a read of the status of your business. Keeping up-to-date records allows you to have an explanation of previous performance and present health status. This exercise also gives you a chance to understand all aspects of the business and prepare a response for any inquiries into different business sections. Those who wish to take over the business are likely to ask questions about areas that seem vague. Imagine the implications of your response on their decisions.
• Review your business plan
Since sustainability is a crucial consideration for any party looking to take over, you need to show a plan covering the business’s future. Demonstrating you have a plan to keep the business profitable in the future adds confidence in prospective buyers, thus increasing its value.
• Review your checks and balances
Business systems are there to streamline and even automate business processes. There are policies, practices, and safeguards you put in place to ensure work is done most efficiently and to minimise chances of losses. Prospective buyers need to see documentation and implementation of such systems to ensure that your operations are aligned with an increasing value in the business. No one wants to take over a venture with too many risks or to have to come up with such risk minimising systems afresh.
• Stabilise all contractual agreements
If you have ongoing contracts with suppliers and other procurement concerns, you need to review those and define your future relationship. The same applies to internal agreements, such as contracts for your employees. These individuals will be significantly affected by the exit process. The new owner needs to also see a proper organisation in that area to ease the takeover process.
• Define your cash flow status
Cash flow is a critical factor in a potential buyer’s decision-making. Therefore, stabilising your cash flow and planning to grow adds significant value to the business. Some investors may use credit to finance their takeover. Your cash flow shows how viable their approach is since they’ll need to pay back what they owe and still turn a profit.
• Minimise your operational expenses
You also need to re-evaluate your processes and see where you can reduce unnecessary expenses. Part of that is by increasing the efficiency of your operations. The business needs to trim down to a lean operation with no waste and covers all bases. Investors will pay more for such businesses.
• Review your organisation structure
Another area that needs streamlining and reducing waste is your organisation’s personnel structure. There may be titles, departments, and individuals redundant in the structure. Additionally, certain processes and practices may overlap in their normal functions, necessitating a review. You, therefore, need to trim down on such waste and repetition, to minimise your expenses and ensure everyone performs their duties most effectively and harmoniously.
Exit planning should be one of your priorities while the business is in its early stages. However, all your focus is usually on setting up the business and managing your operations. Starting the process later or responding to present circumstances can be tricky. A successful retirement exit makes it necessary to hire value creation experts.
We understand how to analyse your business and develop a wealth creation plan that meshes well with your exit strategy aspirations. With over 100 years of combined business, we know the right approach in different situations and for your specific reasons and expectations on an exit strategy. Reach out to us and book a free in-person or virtual 60–80-minute business clinic and let us show you how to add value to your business in the most efficient way possible.
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