How Much of the Future is in Your [Exit] Planning?

How Much of the Future is in Your [Exit] Planning?

November Business Exit Resource

ID-100110368Small businesses – those with a few hundred thousand in revenue to approximately $50 million in revenue – are often run by their founders. Because these founders were generally experts in their fields before they were tasked with running an enterprise they tend to incorporate less planning in their businesses. Rather, these owners often set the strategic directions of their businesses in an ad hoc manner, incorporating various techniques to drive their businesses while mostly setting the direction of the business with their instincts. The purpose of this newsletter is to emphasize the importance of seeing into the future with more purposeful and comprehensive planning – particularly through the use of business growth and exit planning.

The Planning Process, Generally SpeakingID-100285661

Generally speaking, the process of planning for a business’ future is all about setting the direction for the enterprise with the best knowledge and inputs available today. The planning process is not only about forecasting the future, it is also about gaining focus and consensus amongst the team that assists the owner. Done properly and consistently, the planning process for a business provides direction, communication, alignment of resources, and a plan for executing on the initiatives set forth in the plan.

The Six and Twelve Month Plans

When it comes time to transfer ownership of your business to someone else, your level of involvement in the company is going to become a major issue that needs to be discussed and navigated. The primary issue should be obvious – if your company cannot run effectively without you, you should not expect that a buyer of your business will simply take over the company without your active involvement and be successful in the future. Second, when owner dependency is high and the owner’s active involvement in the business is required for the business to operate, risk associated with the business is higher and overall value (including how and when an owner would get paid for the business transfer) tends to be lower. In short, a high owner dependency makes for a difficult business to transfer and hampered valuations. While the planning process is about looking into the future, it is a matter of how far into the future any owner can see that is the greatest challenge. While the visibility of a business’ future is often difficult to see beyond the immediate 24 to 36 months, it is important to look beyond these more obvious planning dates when planning an exit. For example, an owner may be accustomed to hold planning meetings for the next three (3) to six (6) months for their business. At a tactical level, this three (3) to six (6) month plan provides immediate direction to the managers and allows the momentum to carry forward with the businesses’ current initiatives.When it comes time to transfer ownership of your business to someone else, your level of involvement in the company is going to become a major issue that needs to be discussed and navigated. The primary issue should be obvious. If your company cannot run effectively without you, you should not expect that a buyer of your business will simply take over the company without your active involvement and be successful in the future. Additionally, when the owner dependency is high and the owner’s active involvement in the business is required for the business to operate, risk associated with the business is higher and overall value tends to be lower. This includes how and when an owner would get paid for the business transfer. In short, a high owner dependency makes for a difficult business to transfer and hampered valuations. While the planning process is about looking into the future, it is a matter of how far into the future any owner can see that is the greatest challenge. While the visibility of a business’ future is often difficult to see beyond the immediate 24 to 36 months, it is important to look beyond these more obvious planning dates when planning your ultimate exit. Failing to do so will only increase the “owner dependency issue” relating to your exit.

For example, an owner may be accustomed to hold planning meetings for the next three (3) to six (6) months for their business. At a tactical level, this three (3) to six (6) month plan provides immediate direction to the managers and allows the momentum to carry forward with the businesses’ current initiatives.

From time to time the typical owners planning process may include a vision for the entire next year (i.e. 12 months). For companies and owners who conduct annual business planning sessions, they usually occur in the fall or winter seasons, prior to the expiration of the existing calendar year. The planning process is usually started with a projection or a goal for desired revenues for the next year. This target goal is often agreed to by the management team and, once set, the ‘process goals’ are discussed and agreed upon to focus the team.

The Five (5) Year Planning Process

A smaller number of business owners will meet with their teams and engage in multi-year planning processes, up to a five (5) year plan. Being able to look as far as five (5) years into the future fundamentally changes the nature of relationships between owners, their businesses and the management team. By creatively thinking through what the business will look like in five (5) years, though challenging, an owner can advance their decision making ability as measured by long term growth and goal attainment. Additionally, this advanced planning helps the broader team to think creatively about the possible future vision for the business (perhaps after the owner has transitioned to his or her next phase in life).

How Business Exit Planning Extends the Planning Horizon

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One of the most challenging forms of planning is for an owner’s ultimate departure from the business’ day-to-day involvement. An owner needs to look further into the future than ever before due to ever increasing complexity of the business environment. Similarly, because this is such a personal decision and an owners emotions can be a driving force in determining the exit path chosen, these owners are often times making significant decisions without the input of their supporting management teams (this may or may not be what is best for the owners goals).

The point behind this newsletter is to have you ask yourself how far into the future you can see. Generally, the more ‘future’ that can be incorporated into this type of planning, the more successful the overall planning process is likely to be and the better you will be at seeing your business pass on to the next generation of leadership successfully.

Finding Vision Beyond the Short Term

Looking into the future and planning accordingly is a challenging, but rewarding exercise. Professional and experienced advisors who focus on business growth and succession planning can be very helpful in moving an owner into a position where they can develop a long-term vision and incorporate that vision into their overall planning.

Concluding Thoughts

Running and growing a business is tough work and the balance between addressing current pressures while also addressing the future is critical to long-term success. I hope that this newsletter has spurred you to ask yourself how much of the future you are incorporating into your planning and identify the opportunity created by a longer-term business vision.

Regards,546

Perry Moore, CBEC™, CFP®, ChFC®

Direct Phone: 812-602-6306

Email: npmoore@paynewealthpartners.com

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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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Payne Wealth Partners, Inc.
Keystone Financial Consulting
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