Engine or Egg Beater? How To Prep For a Successful Exit
First published on AccountingWEB.com
In thinking about the health and longevity of your business, ask yourself: Is my business running like an engine or like an egg beater? That’s to say, is your business a well-oiled machine with every part running exactly as it should with minimal input? Or, must you manually churn away with great force to accomplish your business’s goals and deliverables?
While the latter can be exciting and fulfilling in the short term, an engine is much more efficient, especially if you hope to eventually sell or pass on your business. It's never too early to begin succession planning. You should continually ask yourself whether your business could operate without you at the helm and, if not, what you would need to do to make it possible. Even if you don’t plan to sell your business, knowing these answers could help you plan for emergencies and unforeseeable situations that would require you to step away from your business.
Whether you plan to keep your business in the family, wish to merge with a Fortune 500 company or desire a strong valuation, you’ll need a strategy, and that strategy begins with knowing your business inside and out, including how each part of the machine works together. I recommend that all companies, regardless of size or years in business, ask themselves the following questions annually to stay prepared for next steps and succession planning.
What is required to keep moving forward?
How is the business run day to day? Who are the key players, and how do they do their jobs? What tools are necessary for work to happen? Take a look at your processes, resources and business relationships.
Is all the money owed recorded?
Do you have all liabilities recorded with backup documentation? Make sure to account for the following:
Owner’s contributions
Personal loans
Lines of credit
Note receivables, including internally
Assess the health of your employee culture by evaluating the following:
Does every employee have a clear job description?
Are certain employees under contract?
Is your employee handbook current, compliant, readily available and accepted?
Do you have clear policies about employee benefits, including profit sharing, PTO, salary increases and so on?
Is leadership in harmony?
If there are multiple leaders or owners, it’s vital that everyone is on the same page.
Are there any recorded or unrecorded accrued distributions to partners?
Do you have a cap table with up-to-date information?
What do the numbers say?
It’s no surprise that succession planning involves clean books and keen analysis of the company’s profitability, but many business owners get a bit anxious when it comes to taking a deep dive into their books. Remember, there is no shame in messy books, but getting them up to date is one of the first steps in a successful succession. To begin, ask yourself:
Have you filed your previous years’ tax returns?
Are your books clean and reconciled? Remember, valuation is dependent on data. Sloppy books can cost you tens of thousands of dollars in a valuation and can easily be cleaned up beforehand.
Have you analyzed your margins? Revenue and profit are only part of the equation! Your CFO or financial advisor should be able to help you examine all pertinent KPIs.
Use the questions above as a checklist - it’s a great place to start! What’s less straightforward, but equally important, is articulating your company’s “why.” Many successions fail because the company’s goals and leadership’s motivation are unclear.
What’s your motivation?
Motivation, or company culture, encompasses leadership styles, the environment, unspoken expectations, displays of gratitude, philanthropy and growth mindsets, among other things. In addition to the tangible and practical items listed above, make sure that the following are clear and reflect reality:
Your mission statement
Your core values
Your leadership principles
If there are places where the company could do better, make those adjustments now.
Michelle Löpez
Founder + COO + Advisor
Whether you’re building to sell or plan to work as long as possible, having a succession plan or exit strategy is important for all businesses. Not only does it help you to prepare for the inevitable, it ensures your company and its culture are thriving along the way.