We just read another survey, this one from BEI, that said 75% of business owners said they were ready to exit if the right circumstances presented themselves. And of that same group, 26% believed that they would not have any problems exiting their businesses successfully. The reality according to experts and a number of other surveys we have seen, is that that number is unrealistic. If it ends up being half of that, it would be an anomaly.
So, if only roughly 10% of private company business owners will actually exit their businesses successfully, what is the other 90% doing wrong?
Frankly, our experience is that it is not so much a question of what they are doing wrong, or what they are doing that is bad, as much as what they are NOT doing, what they do not know, that is hurting them at exit time.
And what they are NOT doing is working on a strategy to optimize the valuation of the company. Oh sure, they are working on increasing sales and profits which is the lowest hurdle or first rung on the ladder, but it goes substantially beyond that. They are missing all the other valuation drivers that either add a strategic premium to the valuation or far too often, as much as 90% of the time in fact, they are missing the valuation drivers that are deescalators or cause a significant discount to the valuation based on risk or uncertainty.
If a business owner or shareholder wants to ensure that the company’s valuation is optimized, the smart thing to do is to get a valuation to determine where it is at the moment, determine what areas need improvement and then spend a significant amount of time, years, preparing the business for a transfer of ownership, a long time before the owner(s) are ready to exit. Annual or semi-annual valuations will tell the business owner if they are on track in improving the valuation. And high quality business valuations that meet the highest standards, such as those offered by Avantt Partners, have become affordable enough to make them a standard part of the annual business planning process.
However, even that will not tell the owner if the valuation is truly optimized without also tracking improvements in all the other valuation drivers. Remember all those valuation drivers that add to or subtract from, the business valuation. Often, experts will recommend spending focused time and effort working on improving those areas. For an idea of where to look, go to the description of our Valuation Driven Strategy in items 3.0 – 8.0.
The take away? The 90% of business owners who do not have businesses prepared for an ownership transition no longer have an excuse. The tools and the technology are here now to provide the information that was previously unavailable. The business owners who do implement a valuation driven strategy will come out far ahead of their contemporaries at deal time, whenever that is.