There are a number of different exit strategies that are available to business owners who are looking to pass on the reins of leadership. Selling your business with an eye toward enjoying retirement can be an exciting prospect and yet it’s also one that requires diligent planning, often well in advance. An important – if not the most important – aspect of developing an exit strategy is putting together a plan that maximizes the value of your business for when the time to sell rolls around. This might sound like a truism but unfortunately in practice many business owners in the defense industry fail to make their business valuations reach their full potential.
The Value Gap
Determining whether you will get the money you need for retirement through a business sale ultimately boils down to establishing business valuation. The so-called “value gap” is the difference between your present net worth and the wealth you will require during your retirement years. Minimizing this gap or, preferably, eliminating it entirely is arguably the most important objective of any exit planning endeavor. Doing so is called “de-risking,” a multi-step process that attempts to make a company more valuable in the eyes of risk-averse buyers.
De-risking should always be an inherent part of all exit strategies for business owners. It generally should start with an overall company assessment that objectively reviews all of the company’s strengths and weaknesses. In particular, this assessment can address management strengths, industry contracts, and drivers of revenue. The overarching goal of de-risking is to create verifiable value within the company that is distinct from the business owner who is selling it. Ultimately, a potential buyer wants to be reassured that all value will remain with the business after the owner has departed.
How to Maximize Business Value
The best business entrepreneurs have historically been those who excel at maximizing business value and exiting a company at a price substantially higher than what they paid to acquire or start it. The following a brief look at just of some of strategies they used:
Niche Positioning
One clear way to maximize value is to position your company in a clearly defined niche, or area of specialization. In other words, your company must be the best at what it does, as opposed to being average at many different things.
Org Chart Excellence
Many exit planning advisors – like us at High Stakes Partners – strongly suggest having an organizational chart in place that fosters an orderly change in company leadership.
Relationship Building
Building strong customer and vendor relationships and developing your company’s brand are all intangible assets that can be added to your company’s balance sheet. Doing so can, however, take time. Having a strong Public Relations strategy can be a huge asset in this area.
Customer Diversification
A potential new owner understandably won’t be overly interested in buying your company in the absence of a diverse customer base. A general rule of thumb is to shy away from having a single customer that generate over 20 percent of your business revenues.
Solid Record Keeping
Establishing solid record keeping protocols early on and vigorously sticking to them will pay off tremendous dividends during the sale process. A prospective buyer that is committed to performing its due diligence will expect to have access to financial statements, employee agreements, marketing materials, and the like.
A Word About Succession Planning Strategies
Most exit strategies for business owners must also take into account any one of many different types of succession planning strategies. The latter is designed to ensure smooth business continuity by preparing new company executives when there is a change in ownership. Succession planning strategies are key for retaining high-performing employees and motivating them to confidently assume their new leadership roles.
Contact High Stakes Partners
For more information on how to maximize business value and how to begin the important process of exit planning, contact High Stakes Partners today. Our team proudly provides a broad range of defense advisory services and specializes in helping contractors navigate the aerospace and defense industry.