Scott Snider knows how to make an exit.
As Vice President of the Exit Planning Institute, he leads hundreds of Certified Exit Planning Advisors from across the globe who help lower middle market business owners build value in and exit their companies. Apt to teach from experience, Snider exited his first entrepreneurial undertaking, a landscaping business, when he was just 24 years old.
“Only about 20 percent of companies on the market actually sell, leaving about 80 percent to kind of fall by the wayside,” Snider said. “Whether you’re a 30-year-old business owner or a 70-year-old business owner, it’s all about being really prepared.”
With this in mind, Snider advises business owners to begin planning their exit immediately, regardless of if the business was just started or has been around for a long time. Since baby boomers currently make up a large amount of business owners and 75 percent plan to transition over the next 10 years, it’s going to be a particularly competitive selling market. So, even if you’re not interested in exiting in the foreseeable future, the time to begin preparing is now.
To prepare advisors and business owners for a successful and fulfilling exit, he equips them with the Value Accreditation Methodology, a strategic framework that addresses some of the biggest hurdles owners face when exit planning and how to overcome them. The Exit Planning Institute rolls this framework into three top tips for exit planning:
1. Maximize business value
The Exit Planning Institute believes that exit planning is business strategy. By focusing on building a business with characteristics that drive value in the present, its value is inherently being maximized for an eventual sale. “By focusing on right now, you drive positive results, positive outcomes, more income and more efficiencies today,” Snider said. “So stop thinking about it as an exit plan and start thinking about it as value acceleration. If you’re always prepared for a transition, the exit is irrelevant.”
To understand the overall value of your business, Snider says owners must examine the value of its intangible assets, which boil down to what he calls the “4 C’s:”
- Structural capital – established processes for operations and financial documentation
- Customer capital – customer base, relationships, contracts and agreements
- Human capital – employees and professional development programs
- Social capital – company culture
The more transferrable the 4 C’s are to new ownership, the higher the value of the business is. Much like the Five Fundamentals, increasing value in these areas drives business growth and prepares the owner for sustained success whether they are looking to sell their business or not. Because both strategies maximize value, Snider said, “Exit strategy is just good business strategy. There’s nothing different.”
2. Develop a personal financial plan
Selling your business isn’t all about the purchase price. Business owners looking to exit need to consider the net proceeds that they’re taking home at the end of the day and whether it will be enough to sustain the lifestyle they desire for 10 years or beyond. Factoring in contingency plans is also important. Many owners fail to address the possibility of the “5 D’s”—death, divorce, disability, disagreement and distress to the business, which can result in financial instability down the road. Snider advises that you cannot have a successful and fulfilled exit without taking an honest look at your financial needs and determining how those are going to be met in the coming years.
3. Prepare for your next act
A 2012 PricewaterhouseCoopers survey found that 76 percent of owners who sold their business profoundly regretted the decision within a year—not because they didn’t maximize value and minimize taxes or because they lacked a secure financial strategy—but because they didn’t know what they wanted to do next. “We business owners spend 80 hours a week on our business because it’s what we love doing. It’s not work for us, it’s passion,” Snider said. “After having that big passion suddenly disappear, what do you do with that 80 hours of your life for the next several years?”
According to Snider, there’s no right or wrong next act for an exited business owner; some may choose to start another business, go into consulting, travel or simply spend more time with family. But he emphasizes the need to understand who you are outside of your business and think about what’s going to fulfill you after exiting, because making the transition can be very emotional and may even inflict a sense of aimlessness.
He said, “Most business owners aren’t soft-issue kind of people. We deal with some very hard issues. So, when it comes to investigating ourselves and having those emotions [after a business sale] …that’s not something we navigate quite often. You need an advisor to help walk you through the changes because it’s probably just as hard as when you were starting your business.”
Effective exit planning involves building company value, creating financial independence for the owner, and planning for a fulfilling life after exiting. But converging these three aspects of exit planning into a single strategy can be a challenge in itself. Business owners may become laser-focused on just one aspect of planning, which could cause the others to suffer. To achieve the right balance, it’s important to begin the process immediately and refine it as you add value to your business. Exit planning is a task for the present, not “someday.”