Exit Planning for Modern Leaders: How to Determine Your Company's Worth
A proactive approach to help you profit the most when it's time to move on.
The past couple of years have seen a number of CEOs and company owners exiting their posts, from Disney CEO Bob Iger in February 2020 to Girls Who Code CEO Reshma Saujani in February 2021. These moves, as well as the ideas and motivations behind them, have cast a new light on one of the most crucial business fundamentals: exit planning. One of the often-overlooked components of leadership and success, this should be an integral part of a business plan from the start, because how you exit can have a major influence on your business's ultimate goals and provide it with a clear future direction.
Put simply, you're never caught off guard if you've put in place the building blocks of selling. If you haven't done so, you risk losing an opportunity when an eager buyer suddenly appears, or at the very least have likely reduced the company's valuation. In fact, with a well-planned strategy, its value will be enhanced in the eyes of potential buyers. Furthermore, a successful exit can take years to happen, so any head start in planning will make transition efforts more efficient.
This kind of planning can be tempting to put off, but procrastination, as well all know, usually has negative consequences.
Knowing your company's worth is key
One of the most crucial things to lock down in exit-planning is company value. You are not prepared to sell if that figure is unclear, but determining it is not always easy. This is an involved process that looks back over the past few years to assess financials over that period, as well as a consideration of the company's assets and a look at current market conditions. One aspect of that last component is the presence of motivated buyers — those who would most benefit from the acquisition because it fits in with their market strategy.
It's critical to solicit the help of outside experts, no matter how a valuation is carried out. These can include investment bankers, business appraisers and brokers. It's important to enlist the input of those who value businesses for a living, ideally someone who is also adept at exit-planning.
Once you have arrived at a valuation, you should optimize selling by finding the most motivated buyers, yes, but also by preparing materials detailing the benefits of owning the company, along with any other actions that cast it in a favorable light. The goal is to make buying appear like a deal that a smart businessperson should not pass up.
Three ways to set value
• Asset method. This is done by simply calculating the difference between a company's business assets and its liabilities, and works best for those that hold value more in assets than income currently being generated. In advance of putting the company up for sale, be sure to deal with any potential liabilities that may not be viewed positively during negotiations.
Also keep in mind that sometimes the asset method can undervalue a business. A prime example of this is Google, which, if valued solely by assets in 2018 would have had a value of $175.4 billion, when it fact its total valuation at the time was $739 billion.
• Income method. Here, valuation is based on the present value of future cash flow, which is forecast-adjusted (discounted) according to the risks involved in a future purchase. This method works well for startups that have high growth potential down the road but have yet to generate a profit or amass any assets. One might report net income or, in some cases, use the company's measure of profitability or earnings before interest, taxes, depreciation and amortization (EBITDA).3
An example of this applied successfully was the attraction of investors to CrowdStrike (as reported by The Motley Fool in a June 2021 article), despite the company not yet generating profit by that point. So, be sure to assess what type of future growth is expected and why, and make this case to potential buyers.
• Market method. In this case, valuation is based on what has been happening recently in a particular sector in terms of sale prices for comparable companies. Some owners may prefer to use this technique, particularly if they're an established presence in an active industry. When using this method, don't shortchange yourself in relation to others. Remember to ask, "What are our unique assets and what other competitive advantages do we have?" Also consider how other factors might adjust market value. (For example, how environmental issues or governmental concerns could affect the business.)
This method works similarly to getting a comparable price for determining real estate sale value. If one business sells for $100,000, a similar one in the neighborhood is likely to sell at or near that price. It might be clear, then, why a market method won't work as well for startups that offer a brand-new and/or industry-disrupting service: There simply won't be other company acquisitions to compare it to.
Get your strategy in place now
Because exiting is the final step in owning a business, it's all too easy to postpone planning for it. However, wise leadership knows that it's never too early to do so, and the earlier the better. As they say, the best time to plant a tree was 20 years ago, and the second-best time is right now.
So, do your homework. Know your assets and liabilities. Select a valuation method that's suitable and speak with trusted experts, but don't rush the process. When you've determined how much your business is worth, you can then focus on maximizing that price. By doing this, you can also ensure continued business success even after your exit.
Entrepreneur Editors' Picks
How an Encounter With the 'Armpit of Destiny' Helped the Founder of Grubhub Take His Business From His Apartment to a $2 Billion IPO
You Can Train Your Brain to React to Stressful Situations Better. Here's the 3-Step Process.
A Disastrous Valentine's Day Inspired This Founder to Launch Her Own Floral Brand. It Became a Celebrity Magnet With Retail Revenue Up 450% Since 2019.
What Is Your Dream Job? Ask Yourself These 4 Questions to Find Out.
This Is the Crazy Process This Juice Franchise Went Through to Get USDA-Certified Organic. But It Sure Has Paid Off.
No One Would Rent Me a Café in Trendy NYC Neighborhoods, So I Tried Something Risky. Now I Have 3 Coffee Shops.