The Strategic Exit: How Preparing to Leave Can Improve Your Stay
By Linda Ratner
In the realm of business, where the stakes are high and the outcomes deeply personal, a single truth emerges: most business owners have a significant portion, up to 80% of their net worth, intimately tied to their company. This reality presents a stark contrast to many employees who may enjoy diversified investment portfolios, and as such, it underscores a risk-heavy investment strategy for entrepreneurs. This understanding demands a shift in perspective, a new way to view business vitality and investment appeal. Most owners are at risk of failing to fully realize the value of their life’s work. This value can be shared with the dedicated employees who have contributed to the company’s success. Yet, not realizing the value doesn’t have to be the case.
As a seasoned business coach and certified exit planner, my mission is to guide entrepreneurs and their teams through the intricate process of scaling their businesses. By harnessing the power of established methodologies like EOS and Scaling Up, along with the Predictive Index and strategies for value building and exiting, I work collaboratively with leaders to unlock the potential within their companies. This journey is not just about aligning your team with the company’s vision or optimizing customer relationships for profit; it’s about constructing a solid foundation for scalable growth and nurturing a dynamic company culture. In doing so, we safeguard what you possess and mitigate risks, setting the stage for your future endeavors.
This expedition begins with identification—a clear-eyed assessment of where you stand today. It’s an exploration that delves into three distinct yet interconnected gaps:
- The Wealth Gap: The difference between your net worth and the amount you need to retire comfortably while maintaining your desired lifestyle.
- The Value Gap: The range of trading multiples for your industry, where higher is better.
- The Profit Gap: The spectrum of profit margins within your industry, from average to top performers.
Grasping these gaps for you and your business is pivotal; it’s not merely about the figures but a profound comprehension of your business’s intrinsic market worth. Echoing Chris Snider’s insights from his book Walking to Destiny, this baseline sets the stage for every subsequent step. “First, we need to identify value and where your business benchmarks are in the range of value, which sets the baseline for everything going forward. This is important for several reasons. First, as you know, it is likely that 80% of your net worth is locked in your business. Second, you need a system built to continuously focus your team on maximizing value. Third, the ability to unlock that value at some point in the future will make a significant difference to your lifestyle and, at exit, will fund your next act. Last, you need to know this valuation number for business planning, personal planning, and estate and tax planning purposes.”
Understanding where your business stands in terms of value is not just an exercise; it’s a critical step in strategic business planning. Knowing your business’s value and the range of multiples investors might offer provides a clear starting point.
Why Is This Important?
- Net Worth Insight: Recognizing that a significant portion of your net worth is tied up in your business is eye-opening. It shifts perspectives and priorities, emphasizing the importance of maximizing value for the owner and the entire team. Understanding your current net worth and what you need for your next act, also known as your “Wealth Gap,” is imperative when making personal and business decisions. My work today is fueled by my passion for helping business owners and their teams reach their goals. My personal experience with selling my company without fully understanding its potential taught me the importance of being aware of the Profit and Value gaps, and it’s a lesson I bring passionately to my clients and their teams. Managing your “Wealth Gap” is critical for informed decision-making in both personal and business spheres.
- Strategic Focus: A valuation sets a clear target for the entire team. It’s about aligning every department and function towards a common goal—increasing the business’s value. Once your Value and Profit Gaps are known, you can leverage the drivers that increase the return on your investment exponentially.
- Future Lifestyle and Exit Planning: Many business owners’ ultimate goal isn’t just to grow their business but to ensure it contributes to their desired lifestyle and retirement plans. Moreover, they seek to honor their employees’ loyalty by sharing their success. Knowledge of your business’s worth is essential for shaping your future and that of your employees.
- Essential for Planning: Understanding your company’s valuation is foundational for planning, whether for business growth, personal financial planning, or preparing for future transitions.
As we delve into business valuation and growth, we must recognize that 80% of a company’s value lies beyond its tangible assets or financial performance. We at the Exit Planning Institute refer to this as the 4 Cs (capital): Customer, Human, Structural, and Social Capital. These intangible assets form the bedrock of a company’s potential and sustainability. They are the keystones that hold the power to unlock a business’s latent value, driving its current performance and future growth and scalability.
- Human Capital: This encompasses the caliber and strength of your team’s competencies, execution ability, decision-making and prioritization skills, innovative capabilities, enthusiasm, integrity, resilience, intellect, and the capacity to operate effectively even in the owner’s absence.
- Customer Capital: This refers to the depth and quality of your connections with your customers and business partners.
- Structural Capital: This is about the robustness of your organizational framework, encompassing your business strategies, operational systems, internal processes, resource allocation, and the financial architecture that supports and enhances your Customer and Human Capital.
- Social Capital: This represents the strength of your company’s culture, including the shared values, beliefs, and practices that foster a cohesive and productive workplace environment.
Even if the sale of your business is the furthest thing from your mind, recognize that the right exit strategy is an optimized one, as it ensures that every aspect of your business is tuned for peak performance. A well-constructed strategy places your operational efficiency, market standing, and financial vitality at the forefront of your measurable growth plans.
In the upcoming series of articles, we will explore the remaining stages of the Value Maturity Index—Protect, Build, Manage, and Harvest—and investigate their synergy with the foundational elements of Customer, Human, Structural, and Social capital. These stages are instrumental in advancing your company toward heightened efficiency, efficacy, profitability, and a dynamic organizational culture. Yet, the transformation journey begins with the ‘Identify’ stage, where we establish a precise baseline to anchor and guide our strategic progression.
The Assessment: Your First Step
Initiating this journey with a professional and independent valuation might seem daunting, but it’s a critical investment in your business’s future. This assessment provides a baseline and sets the stage for continuous improvement. When I work with my clients, we revisit and reassess to ensure our strategies increase their business’s value and validate their investment in this process.
I invite you to take this crucial first step with me to get the ball rolling and set the foundation for your business’s growth journey. Let’s conduct this assessment, identify your business’s current value, and chart a course toward maximizing that value.
Ready to unlock your business’s true value? Contact me at Lratner@ratnerconsult.com to schedule your business valuation assessment and start your journey towards increased business value and personal wealth. Mention San Antonio Woman, and I will provide the preliminary assessment at no cost.
