Tom Stine, CEO of Viddler Inc., an online business skills training academy in Bethlehem, once said, “The only reason to get into business is to get out.”
His advice is not only sage, neglecting it is probably the single biggest barrier to family business success today – and the business’ ability to transition to the next generation tomorrow.
Getting out doesn’t mean you start a business just to flip it. That may be a goal, but that is not what we’re talking about here.
Rather, we’re talking about building a sustainable business that creates wealth for the family and has value that someone (an insider or outside third party) would buy to keep the business alive, successful and funding your retirement or next venture.
The message is clear. From the day you start your business, you should be thinking about how to get out.
To be sure, these things are a lot harder to get out of than to get into. With a clear understanding of the exit, you will design your business accordingly, bring on the right people and build a business of value.
As the market changes, you may need to adjust, but you will be adjusting with intent, not just reacting to the direction of the winds of change.
Exit strategy is business strategy. Planning for your exit, whenever that may be, is not the same as selling.
Done well, it comes years ahead of any thought of leaving the business.
There are two types of family businesses – lifestyle and enterprise.
Both can be very successful and rewarding, but only one has true value that can be converted into cash one day and survive to the next generation – the enterprise.
A lifestyle business is one in which the business generates enough profit to fund the owner’s desired lifestyle. Generally, the owner is a bottleneck in the business because everything needs to go through him or her.
The owner is the hub, and many owners like to say this makes their business efficient, with low overhead.
But the hard truths are these:
<The business cannot outgrow the capability of the owner – he is the ceiling of growth because he has not brought anyone else into the inner circle to help grow and run the business – it can only grow to his capability.
<This business has little value to a potential buyer because all intellectual capital, all customer and vendor relationships and all day-to-day operational decision-making go with the owner. Once he is out the door, so is all value.
STRONG MANAGEMENT TEAM
An enterprise business is when the business generates enough profit to fund the owner’s desired lifestyle – and has value when the owner transitions out.
One of the leading drivers of business value is transferability of the business. Can it survive without the owner?
The stronger the leadership team that surrounds the owner, the more it is involved in key decision-making, the higher value of the business.
You can’t fake this stuff; it either exists or it doesn’t.
Another major factor of value is risk.
De-risking the business improves value. When a company can successfully function without the owner, risk has been substantially removed from the business.
This again improves value.
But it also affects the owner today, both financially and in terms of freedom, that elusive attribute that drove many into business ownership in the first place.
MORE THAN LOOKS
A major mistake by many business owners is that they prepare for their exit in a manner similar to how they sell their home.
When you put up your home for sale, you repair those items you have put off for years – painting, doors, de-cluttering, etc. – so your home shows well and gets top dollar.
Although some of those same tasks also should be completed when preparing the business for sale, building real value in the business isn’t as simple as getting out a can of paint.
VALUE NOW, VALUE LATER
The good news is that there is a process to accelerating value that works, but it needs time.
And when you create more value in your business today (including customer diversification, a growing and consistent EBITDA – earnings before interest, taxes, depreciation and amortization – nonreliance on the owner, etc.), you reap financial benefits of these moves at exit, and you reap benefits now.
Business exits do not happen by themselves. Too many owners quietly rely upon a hope that something good will happen to them in the future.
Don’t let an outside force such as death, sickness, disability, disagreement, divorce or burnout dictate your exit.
These factors will diminish the value of what you receive at the point of your exit because you are being compelled to exit in a manner and time not suited to your needs.
Remember that a proactive approach to planning your exit gives you options and dramatically improves the odds of survival under new ownership and leadership.
Tom Garrity, managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County, will conduct a Scaling Up workshop – based on the Verne Harnish strategic plan to drive alignment, accountability and focus – on March 13. To register, visit www.scalingupbethlehempa.com. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. Garrity can be reached at 610-336-0514 or email@example.com.