The Ultimate Transition – Planning an Exit
Change is a reliable constant throughout the life of any business. Witnessed in the effects of advancing technologies, shifting regulations, evolving competitive landscapes, and the natural business cycle; it’s hard to argue any differently. Change will come, and it will have a forceful impact. The savvy business owner knows that to be successful, one must anticipate and plan strategically before these transitions occur. Yet there is still one substantial transition that continually catches many owners off-guard. Today, the exit strategy— while one of the most important changes any business will face, remains the least prepared for of all inevitable transitions.
The goal in strategizing for any transition is to anticipate the change, mitigate the risk involved, and ultimately increase enterprise value. In this process, markets get analyzed and data collected; forecasts are made and a variety of plans, including contingency, are put into play. It should be no different when dealing with the exit strategy. And so a paradigm shift is needed, one that more closely aligns with planning for other business lifecycle events. The exit should no longer be lost in the daily minutia of running the business, and it cannot be pushed aside for some far off date that coincides with an individual’s retirement. As an inevitable event the business will succumb to, it needs attention. And with attention, all of the previous successes and accomplishments of the business will be capitalized. The ultimate transition can now result in maximized value and increased personal wealth.
Patrick Donovan, Senior Research Analyst at Schneider Electric, wrote an instructive piece about data center lifecycles[i]; and it is striking how the process of planning, designing, implementing, operating and reviewing a datacenter aligns so closely to the cycles within the business and its overall life span. Each phase that Donovan speaks to is vital to the success, productivity and longevity of the data center. The stage starts in the programing phase, where strategic players set parameters and benchmarks. As the lifecycle continues, it enters the operating and assessing phases. Though the operating portion begins before assessing, the two ultimately run concurrently. During these last phases, peak performance and maximum efficiency of the data center are reached through cooperation and an understanding that the last phase does not necessarily result in the end of the data center.
Now that the exit strategy is understood as part of the business lifecycle, we can see the relevance of Donovan’s stages to a business’ approach. The planning phase, while being of utmost importance, is the most overlooked and least thought-through of all the phases. There is no room for shortsightedness when it comes to this vital preparation. Gather the investors, the decision-makers, and needed advisors. Know the vital industry metrics, set parameters, and schedule timely benchmarks. Like the technology itself, this strategy ought to be modular and configurable— able to pull apart and reassemble in a way that adapts to business and industry changes, yet holds true to key goals and values. And while the advantage may go to the early planner, it is never too late to begin this phase. Where ever the business lifecycle is, start strategizing now. The key for this stage is to be thorough, organized, and managed; this will ensure that fewer surprises come up down the road, and the business itself is prepared for potential unplanned occurrences.
Once a plan is in place, the business and its infrastructure is able to do what it is intended to do, operate. This is potentially the longest phase of the strategy. It is also here that outside advisors can play a crucial role. Utilizing financial experts with experience and skilled tools, such as dashboard services, can aid in the monthly analysis and monitoring. Cooperation is the critical component of this time. This monitoring will allow for the acknowledgement of benchmarks such as the business reaching peak performance and maximized productivity. Further, the team can call attention to, and adjust for, potential hazards that would cause a disruption to the plan. They will also confirm the tools of the strategy are operating correctly: reporting systems remain timely and up-to-date, the financial statements are pristine with expenses closely scrutinized, and customer and labor churn are kept low.
As key goals are met, the stakeholders, decision makers and advisors begin meeting regularly, and ultimately determine when peak value has been reached and it is time to execute the exit portion of the strategy. At this point it is imperative to act. The old adage, strike while the iron is hot, is never more relevant when discussing an exit strategy. This remains a difficult rule for some to understand as they often equate the exit to the end of the business’ life. This could not be further from the truth. To generate the most wealth from the hard work put into the business up to this point, the exit ought to be planned for when the business is the most valuable and most desirable to potential buyers.
Now is the crucial time when the business undergoes valuation and enters a period of due diligence. Once again, the more organized and managed the run up to this process is the more smoothly this phase will be. It is important to understand this is not a process for the unprepared. Many transactions fail in the due diligence phase due to poor planning. Avoid this by understanding every in and out of the business. Know the current economic climate and how this niche of the industry is changing. Know the value metrics set in the exit strategy and how they are relevant within the industry. And finally, set realistic expectations.
It is also central to note that the team to go through this process with can truly help or devastatingly hurt any potential deal. As the stakeholders and decision makers were skillfully chosen, advisors should be researched with careful thought given to their selection process. A skilled advisor, with industry experience, will substantially aid in the strategic planning by knowing how to create the roadmap. And when an actual sale comes, they have the expertise to speak the language of buyers thus presenting the business in a way that will add more value than it costs.
Whether you ever truly sell your business or not, by putting an exit strategy in place, and doing it early, the business’ resources are able to be utilized in the most optimal way, thus building maximized enterprise value. This, then, allows all key stakeholders options. And that is a very attractive position to be in for any business. Further, it prepares you and them for a transition that is an unavoidable part of every business lifecycle; and when planned correctly, can lead to a positive and accomplished exit.