Exit Planning: Make it Rain

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

First, a quick recap of where we’ve been on the Exit Planning parade:

What is Exit Planning?
How long does Exit Planning take?
Transfer a Business to Children
Private Equity
Due Diligence
Selling the Family Farm

Today, a new perspective: Making STACKS by participating in Exit Planning.

That’s right. I said it. Stacks.

AKA

Skrillas. Cheddar. Guacamole. Benjamins. Cabbage. Dough. Paper.

Whatever you want to call it. We’re talking about the same thing here: MONEY.

 

That beautiful, disgusting green parchment that people will die for and kill for.

 

What if I told you that you could make money by spending 40 hours in the next year focusing on Exit Planning?

The natural question is: How much?

What if I said $400? Probably not worth it, right? Most business owners probably value their time a little more highly than that.

What if I said $6,000? Maybe… $150 / hour isn’t TOO bad…

What if I got crazy on you and said $80,000? $2,000 / hour.

What if I said you could easily exceed that?

Fair. If I was in your shoes, I probably wouldn’t believe it either. There are too many frauds out there these days looking to make a quick buck.

But before you close the page, please hear me out.

This isn’t some magic pill that instantly helps “cut the fat” from your business. No, what I’m talking about is much more “pushups and situps” than it is “scientific breakthrough”.

It requires sound business strategy, commitment, and a long-term focus.

 

Making Stacks

Exhibit A

If you are a business owner, one of two methods of valuation apply to your business:

  1. The business is worth the fair market value of the assets it owns
  2. The business is worth a multiple of the income it generates

 

1) Adjusted Book Value

If a business is completely dependent upon the business owner, that business will likely be valued based upon an adjusted book value of the assets on its balance sheet.

 

Example:

ASSETS

ASSETS (ADJUSTED)
      Current Assets       Current Assets
            Cash……………………………… $50,000             Cash……………………………… $50,000
            Accounts Receivable……… $200,000             Accounts Receivable……… $160,000
            Inventory………………………. $50,000             Inventory………………………. $30,000
      Fixed Assets       Fixed Assets
            Equipment…………………….. $400,000             Equipment…………………….. $300,000
            Land……………………………… $50,000             Land……………………………… $60,000
            Building……………………….. $200,000             Building……………………….. $220,000
TOTAL ASSETS……………………. $950,000 **TOTAL ASSETS……………………. $820,000**

Adjusted book value also applies if there are major risk factors that prevent the transfer of customers, revenue and ultimately the income stream to a new buyer.

 

2) Multiple of Income

If a business IS transferrable, a new valuation method applies:

EBITDA * Risk Multiple = Value

 

Example:

EBITDA………………………………………….. $300,000
Risk Multiple Range………………………….. 3x – 6x
Business Value…………………… $900,000 – $1,800,000
1) Adjusted Book Value vs 2) Multiple of Income

It doesn’t take a rocket scientist to understand that small business owners want to be on the green line.

Exit Planning does that.

It takes a business that would be on the white line, and – using sound business strategy – helps reorganize the business so a future buyer will see them as a “safer” investment.

In this case, simply moving from the white line to the lowest possible value on the green line means an increase of $80,000 in value.

 

Exhibit B

The next step in the Exit Planning process is taking a business that is situated on the green line and making calculated steps to move them up.

The average small business has a myriad of risk factors that – when seen by a potential investor – serve to constrain the value toward the bottom of the green line.

 

A good Exit Planner knows what those risks are and tells you to correct them so you can increase your value.

A great Exit Planner gives you tools, advice, and essentially becomes an active stakeholder in your business to help you get the job done.

 

Some examples of risk factors that we see in small businesses:

Weak culture

Poor communication

No long term strategy

High customer concentration

Weak management team

No contingency plan

 

Identifying when you have a risk and telling you to correct it is easy. Our process is literally built for that.

We also have tools and expertise to share that can help make change happen.

 

Conclusion

Exit Planning is THE way to maximize value as a business owner approaches retirement.

Obviously true potential depends on the facts involved, but you know that old adage “the sky is the limit”? Yeah, it applies here.

 

Cynical minds will say I “made up” numbers to serve my own agenda.

My response: Yes. You are correct. Those are fictional numbers. I did not think it a prudent idea to throw balance sheet and income figures from our actual clientele up on a public blog. However, I needed numbers to help you visualize and solidify the concept. In the end, this isn’t a submission to the Harvard Business Review. It’s a casual blog dedicated to teaching complex subjects in a way that people can easily understand. We accomplished that purpose today.

 

Last thing: what I did here – particularly as it relates to the art and science of business valuation – is EXTREMELY rudimentary in nature. Individuals who want to learn more should seek expert counsel.

 

Give us a call or shoot me an email if you have more specific questions!

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