Preliminary Thoughts on Exit Planning Valuations

Various studies indicate that over the next 25 years there will be an unprecedented number of businesses changing hands due to the retirement of millions of business owners who belong to the baby boomer generation.  According to the U.S. Census there are 78 million members of the baby boomer generation, and data indicates that nearly 10% of them are small business owners.  And let's face it, few things are as important to business owners as the value of their businesses because this asset is typically their single largest retirement asset.

Independent surveys show that most business owners do not have an accurate idea of the fair market value of their businesses.  In fact, in many cases, the business owner can be high or low in his/her estimate by a magnitude of 50% or more. In order to establish an accurate value of the business, it is very important to obtain an independent exit planning valuation from a qualified business appraiser and it goes without saying that the closer this is done to the front end of the exit planning process, the better. 

The reason for emphasizing valuation at the beginning of the exit planning process is simple.  The fundamental exit objective questions are:

When are you able to leave the business?
How much in proceeds do you want or need?
Who can you transfer the business to?

Each of the above objectives can only be answered in light of the question, "How much money can I expect to receive upon leaving the business?" This relationship between establishing exit objectives and obtaining an exit planning valuation is not a static one.

An exit planning valuation will not only give a business owner an accurate starting point, it will also supply the value drivers and multiples to enable the business owner to increase value.  Here at Acclaro, we have seen many success stories with sellers for whom we have provided a valuation and worked with for several years off and on until a sale was obtained at or near our client's target number.  A successful exit plan often includes the employment of a concept known as "promoting  business value," whereby the business owner works on his/her business by focusing on the actions he/she can take to build sustainable business value.  An owner will work toward developing a business that can operate successfully in his/her absence if he/she is ever going to exit the business. 

Another key idea is the importance of employing a team approach to exit planning.  An experienced business valuation professional knows that a sound team approach can add significant value, resulting in an optimal sale price for the exiting business owner.  Exit planning is a vertically integrated approach to planning and, in most cases, is a multi-year process.  A business owner's business attorney, estate planning attorney, accountant, investment advisor, and business valuation expert should all adopt a "team" approach in order to design and implement a more cohesive, functional exit plan and, ultimately, maximize the value of the business.

A final thought on the subject of exit planning: Most business consultants agree that exit planning should begin at least three years prior to the anticipated "exit event" in order to maximize the sales price for the seller to have sufficient time to take the necessary steps to maximize the sales price for the seller.

Exiting a business is usually a complex process, but, with proper planning, an accurate exit planning valuation, and a team of trusted advisors, the transaction can be done successfully.