Editor’s Note: This is another in our series on Exit Planning in the Green Industry
In many cases, exit planning begins long before an exit event actually happens, either planned or unplanned. In fact, traditional wisdom suggests that exit planning should begin the day you start or buy a business. Therefore, there may be a significant time lag from the point that you first begin exit planning and the time that plan is executed. In earlier articles, we have focused on understanding the value of your business and improving the value of your business over time. In this article, we focus on preserving the value of your business prior to completing an exit strategy.
A good way to begin assessing how to preserve the value of the business is to assess what risks the company faces that might affect its value between the present time and a planned exit point. Of course the business world is full of risks – some we can control and some we can’t.
What if something happens to you as the business owner that prevents you from devoting your time to the business either temporarily or permanently? Some examples would include your death or disability or your need to focus on other issues, such as the health of a family member.
Is your business so dependent on the continued services of one or more key employees that the business would be severely impacted as a result of their absence? The same things that could happen to you as a business owner could happen to a key employee. In addition, they might simply decide to leave for a whole host of reasons, one of which could actually be to compete with you.
Many risks that threaten the value of the business are related to the business owner having mentally made a decision to exit the business and, therefore, becoming complacent about competitive threats and marketplace shifts or hesitant to make the investments required to achieve its potential.
Of course, there are the traditional risks, many of which may be insurable or controllable, to consider. This is not a time to skimp on insurance and risk management.
Many of us focus on what would happen in the event of our death. However, for a typical 40 to 50-year old business owner, the risk of becoming disabled is approximately twice the risk of dying during your remaining time in the active workforce. We usually think about the adequacy of life insurance and disability insurance to meet your family’s needs in the event of your death or disability, but meeting the needs of your business in the event of your death or incapacity may be a key step in preserving its value as your most important asset.
Business continuity planning has the goal of making sure your business can continue to operate, not only after a natural calamity but also in the event of other disruptions including illness or departure of key employees, supply chain issues or other challenges that businesses face from time to time. It can prove a valuable part of preserving the value of your business.
Here are some important questions to ask yourself as a business owner:
Do you have a written plan for your business if something unexpected happens to you? Have you thought about what would be best for your business and you family in this event?
Have you identified a person who can manage the business in your absence? This person could be a family member, a key employee or perhaps even a competitor. The key here is to identify this person, gain their agreement and make it known in some fashion that this is your desire.
Have you identified a person who can oversee the finances of your business in your absence? This person could be a family member, a key employee or perhaps your accountant or another professional advisor.
What would be the impact of your death, disability or absence on your business’s financing arrangements?
Do you have a specific written strategy or plan to retain employees critical to the operation of the business if you can no longer be active in the business due to death, disability or other reasons?
If you have partners, do you have a current buy-sell agreement in place? Is it backed by a method of financing the buy-sell transaction, e.g. insurance?
Have you communicated your continuity plan to key employees?
A business continuity plan is on many business owners’ to-do lists. Well, maybe it is on at least a few business owners’ to-do lists. With the pressure of day-to-day operations and the rest of life’s obligations, it rarely makes it to the top of the list. In the context of exit strategy planning, the need to preserve the value of your business in order to achieve your exit strategy objectives becomes extremely significant and should not be ignored. There is no quicker way to destroy the value of a business than to remove its visionary leader, its manager, and often its chief sales person without a well thought-out plan for dealing with the void that is left behind.
We often tell clients that the single most important thing they can do to improve their prospects for the sale of their business is to make sure it is continuing to “operate on all cylinders” and to avoid getting so wrapped up in the process of the sale of the business that they lose their edge with the business itself. A business that is stagnant, is not growing or does not react to changes in the market will not be nearly as attractive an acquisition target.
Timing your exit is a complex process. For the most optimum result, your business has to be ready, you, as a business owner, have to be ready and market conditions have to be right. Because those things don’t always happen at the same time, additional risks enter into the equation. While those risks certainly cannot be completely controlled, taking steps like those we’ve recommended here can help make it more likely that when you are ready to sell your business and market conditions are right, that your business will be ready as well.