The First Ingredient to a Successful Exit: Defining Goals
You don't know where you'll end up, unless you plan where you're going. The most important ingredient in an exit process is the goal definition and alignment. In this article, I share what goes into this very important first step.
In my first article, "The Six Step Recipe to a Successful Exit Strategy," I summarized each step, or ingredient, required. Today, I get into the specifics of the first ingredient: defining goals.
An exit strategy begins with a concise statement of the business owner’s personal, financial and business goals. These provide the framework against which all exit planning decisions are made.
Each business is unique and each business owner will have his/her own personal, financial and business goals. These unique goals will drive the creation of the exit plan. There are, however, common elements, or goal categories, to all exit plans, including:
- Specifying the owner’s desired departure date;
- Determining how to enhance and maximize the value of the business;
- Providing a means to exchange that value for cash in the most tax effective manner;
- Ensuring continuity of the business through a smooth transition to new owners;
- Indicating whether the owner would prefer an internal transfer or external transfer;
- Determining how long the owner would prefer to remain with the company during the transition period; and
- Providing security for the business owner and his/her family upon a planned departure or in the event of an unplanned departure (e.g. death, disability, etc.).
To be effective, a goal should be specific, measurable, achievable, realistic and motivational. For example, "To maximize the value of my business when I exit" is not specific or measurable. A much more effective and clearly defined goal would be:
"To grow my business from an enterprise value of $15 million to $25 million within five years so that I can sell to a third party buyer for at least this amount and net $16 million after taxes and other liabilities while remaining with the company under a consulting contract for six months to one year before retiring to enjoy my hobbies and traveling with my family."
Prioritizing the business owner’s goals is also important as certain goals may conflict. For example, it may be extremely important for certain owners to see the business stay in the family. Unfortunately, this exit option usually conflicts with being able to maximize value or price as third party financial or strategic buyers are generally willing and able to pay a higher price. As such, the owner may have to make certain sacrifices to ensure an internal transfer to the next generation (e.g. accepting a lower price, receiving payment over time, staying active in the business for a longer transition period, etc.).
So What Should You Do?
Studies have shown that people who write down their goals are more likely to achieve them than those who do not. This speaks to the effectiveness of accountability and commitment in accomplishing one’s goals. Step 1 in the exit planning process is by far the most critical step. An effective exit plan can not be created without taking the time to carefully consider and define the business owner’s personal, financial and business goals.
Want to know what the next ingredient is? Read my next article, "The Second Ingredient to a Successful Exit Strategy: Financial Needs," which goes into a bit more detail about this ingredient.