Getting a Baseline Assessment of Your Exit Preparedness: Exit Audit Overview

Have you ever been at a meeting that was supposed to be straightforward? You thought you knew the topic, but then the conversation takes you in a direction you never anticipated. This unexpected conversation opens up a whole new world of possibilities and you realize you were just skimming the surface of a much deeper world. These new ideas and concepts are exciting at first as an intellectual exercise - something new and different.

Then you quickly remember that your plate is already overflowing and you don’t have any time for new initiatives.

While you don’t outwardly exhibit it, inwardly panic is setting in. This is also something you need to do, but you just don’t know how you’ll find time to do it.

The paragraphs above closely describe how our first conversation with a new prospective exit planning client often transpires.

Upon first thought, most business owners tend to think they’ve got an exit plan.

It’s mostly in the owner’s mind (unwritten), based on assumptions, and something that you’ll deal with later when you have the time.
However, once you start to dig, just a little, it often becomes clear how half baked and fragile your exit plan is.

When we hit this point in the conversation, a question that is begging to be asked is, “Where do I start?”

How To Start The Process of Exiting Your Business 1, 3 or 5 years out

First, we get our arms around the problem with an Exit Audit.

To get from nothing to something, you’ve got to start somewhere. For many of our clients that are not looking to exit immediately (>1 year from desired exit), an Exit Audit is the place to start.

Our Exit Audit provides you, the owner, with a holistic view of the business from an investor’s point of view.

Whether you plan to sell your company to private equity, transfer the business through succeeding generations of your family, or anything in between, taking an investor’s perspective is 100% the best way to set up your business for long-term success.

So what does an Exit Audit entail?

The process of completing an Exit Audit has two steps: data collection and analysis/report writing.

Data collection involves the pulling of financial data on the business: income statement / profit and loss statement, balance sheets, cash flow statements, and a few other documents. It also includes two separate in-depth interviews with each owner and key management team members (when relevant). The number of interviewees can vary from 1 to 5 (or more), depending on the company’s structure and complexity.

With regard to the analysis/reporting writing phase, we have three workstreams.

First, we develop a “limited business valuation” which utilizes the company’s financial information combined with basic business valuation methodologies to come up with a reasonable range of value the business might expect in a sale. The output here is a low and high end of what we consider to be a reasonable market value; for you statistical types, we would be approximating within 1 standard deviation of the mean value. It is “limited” because it is for internal use only, whereas for anything utilized in other capacities will require a Certified Valuation Analyst (CVA).

Second, we summarize and analyze the numerical scores from the in-depth interviews to determine a company score for business attractiveness and exit readiness, along with numerous related subcategories within these two broad categories. This output comes in the form of graphs and tables, showing where you land compared to the ideal state.

Put simply, business attractiveness is defined as how excited will investors be when reviewing marketing materials for your business. On the other hand, exit readiness is defined as how likely are you to convert investor excitement into a closed sale of the business. To use the residential real estate analogy, the former is how it looks on Zillow, while the latter is your point-of-view after the walk through and inspection. Nearly universally, our clients are more attractive than ready, which helps to explain the historical regularity of business sale processes generating strong initial interest, but ultimately failing to complete a transaction.

Lastly, we review the limited business valuation, the scores on attractiveness and readiness, pour over our written notes, compare scores amongst interviewees, and draft a report which results in recommendations and next steps.

This is where we take all of what we’ve learned and synthesize it to answer the question, “Where do we go from here?”

The Exponential Value Equation

Warren Buffett’s great biography is called “The Snowball”. The title is a metaphor for Warren’s life. He started with paper routes and pinball machines in barbershops, as a grade schooler. He then took those profits and invested them in the next thing, repeating the process over decades eventually becoming the world’s wealthiest person. He started with a tiny snowball and as it rolled down the hill it gathered more mass and continued to accelerate. The growth in his business empire was exponential.

In our experience exit planning is the same way. Starting small now will inevitably lead to exponential changes in the value of your business in the future. Warren Buffett did not wake up in his 50s and decide he would be rich. He started making small decisions as a young boy and these accumulated into his financial success in his 50s.

An Exit Audit creates a road map of the things you can start doing today, without interrupting everything you’ve got going on.

If planning for your inevitable exit, no matter how far off, is something you need to prioritize, but you don’t know how to start or where to find the time, we at Doescher Group are here to help.