There is an old adage of tasks taking as much time as is available. However when it comes to exit planning, there is a significant increase in value as a result of allowing for adequate time. As a rule of thumb 1 year is the minimum amount of time required to adequately plan and prepare a business for exit. Ideally, 3 – 5 years are needed to optimize the value of the business and prepare the entrepreneur for transition.
Most small and middle market businesses are sold on multiples of earnings/cash flow. Most buyers in this arena look at the business like an annuity...something that throws off cash each year. Buyers are willing to pay a higher price for businesses with greater predictability and consistency of cash flow. Think of it in terms of any investment…..you are willing to accept a lower yield (i.e. higher principle price) for a Treasury Bill or CD than you are for an unsecured corporate bond for the same reason….less perceived risk as a result of great predictability and consistency of cash flow.
The timeline for the STEP process is as follows:
The first 90 days are consumed with developing the appropriate Succession, Transition and Exit Plan for you and your business.
The next 2 quarters are spent implementing and fine tuning the elements of the Plan.
The 4th quarter is spent monitoring the plan, changes and results to make certain the desired effect and outcome are being achieved.
Year 2 is spent continuing to grow and evolve the business in the areas of need identified in the STEP process. Additionally, year 2 is the initial year of proving the predictability of cash flow and profitability of the business being run under the Plan. Year 2 becomes your baseline on which you can base your forecast of cash flow for presentation to prospective buyers.
Year 3 is the time you continue to prove the predictability and consistency of cash flow and begin exposure of the business to the market. The old saying is that it takes 2 data points to make a trend. Years 2 and 3 are those initial data points.
Years 4 and 5
These are the years in which you will ideally take the business to market and consummate the sale. The exact timing depends on a number of issues but giving yourself the flexibility of time can often affect the ultimate amount realized by as much as 40% - 50%.
Summary & Recommendations
According to the Small Business Administration, most business owners who begin the exit planning process do not follow through. You need a written plan that:
Feel free to look around the STEP information, The Process, Timing or other Resources, take a look at our Exit Planning Team then Contact Us by stopping by our Texas office in Houston, or give us a call (281) 488-2022 to obtain more information or to schedule an appointment today.