I recently had the honor of interviewing John H. Brown, author of Exit Planning: The Definitive Guide. My goal was to pull out of him his take on exit planning from the buyer’s side. I had a theory, and in our conversation, I found that great minds think alike.
Conceptually, exit planning from a seller’s perspective makes perfect sense. But my big question for John was if we consider it from a buyer’s perspective, is exit planning like putting lipstick on a pig, or are there underlying long-term value drivers that are actually being impacted?
Many acquisition entrepreneurs view exit planning as the former, not the latter. They see it as the seller doing all they can to increase the value of the business in order to sell it for more.
But as the two of us agreed, the latter is actually true. Exit planning, when done properly, actually helps the buyer and the seller in different ways. Let’s look at a couple of examples.
How Exit Planning Benefits The Buyer
For the buyer, exit planning makes the business more transferable. When a buyer is evaluating a potential business acquisition, transferability is one of the top factors to consider.
Once the current business owner leaves, are they taking a lot of specialized knowledge with them that the buyer will need to grow the business? The answer needs to be no. The buyer must be able to walk into that business as an entrepreneur and work on the business, not in it. If they have to be the artisan (baking the pies from Michael Gerber’s The E-Myth, for example) in order for the business to succeed, they need to reconsider buying that business.
In addition, buyers need to make sure that any extensive customer relationships the current owner has can be transferred to them if they buy the business. If those relationships end when the seller walks out the door, the buyer will be working at a disadvantage from day one.
Both aspects of transferability point to a business where the owner is not the hub of the wheel. Good exit planning begins the process of making sure that’s not the case. Secondly, it focuses on employing the best possible management team. By building standard operating procedures around a team of people, the value becomes diversified among the different employees. When that value is spread out across the company, it mitigates some of the risk for a buyer.
Exit Planning Gives Sellers A Blueprint
So, how does proper exit planning benefit the seller? The primary benefit is that it helps the seller calculate how much money they need to exit. If they’re living on a certain amount per year, for instance, the current owner will need to sell for a sum of money they can live on for the rest of their life without having to decrease their cost of living. Once the seller knows that number, they can gear their exit planning toward getting the value of the business to that point.
With a number in mind and a plan in place, the seller then becomes goal-oriented. They’re not going to pull the plug on a deal because they’re committed to hitting that goal. They’re going to engineer transferability and diversify their talent pool to make the business more attractive.
Proper Exit Planning Is Good For Both Parties
Exit planning is not about squeezing every last drop of value from the business or taking all the growth opportunity off the table. That’s the “end gaming” approach to exit planning that makes potential buyers leery of acquiring businesses. When done correctly, exit planning gives the seller clarity, lowers the risk for the buyer and leaves the door open for future growth.
This article originally appeared on Forbes.
