Every business owner’s ownership interest will change hands at some point during the business owner’s lifetime or immediately thereafter, either voluntarily or involuntary. That change may include the sale of the business to a third party, the transfer of the business to family members or employees or the liquidation of the business. Most green industry business owners would agree that having an exit strategy or a plan for how the ownership interest will be transferred is a good idea. Few, however, have gone through the process of developing an exit or succession plan.
There are four basic steps in developing an exit plan: determining the owner’s objectives, assessing the current value and marketability of the business, developing an action plan for preserving and enhancing the value and marketability of the business, and developing a plan for the sale or transfer of the business in the future.
The Objectives of the Owner
Before proceeding with developing the exit plan, the owner must determine what his or her objectives really are, including determining when he or she wants to sell the business, to whom he or she wants to transfer the business and what net cash flows he or she will require after the business is sold. Determining one’s true objectives requires some soul searching and may require assistance from financial professionals.
Assessing the Current Value and Marketability of the Business
In order to determine the best way to reach the objectives of the business owner, it is necessary to assess the value and marketability of the business. Ultimately, the marketplace will determine the value of the business, but an assessment of the business’s value and marketability are necessary in order to determine if a business sale can reasonably be expected to produce a result that will allow the owner to achieve his or her objectives. A formal business valuation may or may not be necessary, depending on the intentions of the owner. For example, a formal valuation may be necessary for tax purposes if the transfer will be made to a family member or if a sale is to be made to an entity such as an employee stock ownership plan (ESOP).
An assessment of the cash flows of the business is a key component of valuing the business and is also a key factor in structuring a transfer to family members or employees. In addition, an assessment must be made of current market conditions and the best time to go to market.
Preserving and Enhancing Value and Marketability
After assessing the value and marketability of the business, a plan can be developed to enhance value and marketability. This plan is based on an assessment of the value drivers of the business. Value drivers are usually related either to the long-term growth prospects of the business or to factors that reduce a prospective buyer’s risk that the business will not perform as expected.
Put more simply, the plan addresses steps that can be taken to improve the value and marketability of the business. The good news is that in most cases the same steps that improve the value and marketability of the business in the long-term will improve the operations and growth prospects of the business as well. These factors may include matters relating to management and employees, operational issues, the nature and quality of the customer base, financial controls, facility issues and tax planning, among others.
Developing a Plan for the Sale or Transfer of the Business
Based on the objectives of the owner, the assessment of the value and marketability of the business and the plan for improving value and marketability of the business, a plan can be developed for the sale or transfer of the business. This plan will include the process to be followed and the proposed timing. This plan will be revisited based on inevitable changes in the owner’s objectives, the state of the business and market conditions until the time comes to execute the plan for the sale or transfer of the business.
In future articles, we will be examining in more depth each of the four steps in exit planning.