Exit Strategy Management Should Focus on Value More Than Price

Selling is all about Price, but Exits are about Price and Value

Get past the personal investment in order to transition out of the business.

Finding the right time to exit a business is a challenge for every business owner. Not only does time seem to speed up as the inevitable exit approaches, but the inherent decision making process accelerates as well. In order to keep time on their side, business owners are well-advised to look at the coming exit from the aspects of both price and value early in the process. The dilemma is that time spent reflecting on the business and the personal investments to create it can distort the view of price and artificially inflate the perception of value.

What may feel like just yesterday in one moment, may lead to an awareness and focus on the personal efforts and time invested in a business to get it to its current state. Pride of accomplishment and shock of a pending exit converge and it can be difficult to keep price considerations separate from the nostalgia of value.

Timing also comes into play when owners must consider the ideal opportunity for departure. Is it better to leave when owners are in their prime, their families are young and active or when owners are closer to retirement age and finances may be more plentiful and family duties have relaxed? Pressures from spouses, kids, businesses partners, bankers and board members may amp up the already churning emotions and add “biased” pressure.

This biased pressure can also impact another kind of pressure – blood pressure – not to mention stress levels. Owners need to address and work through common feelings of worry, mistrust and fear to get to calm, logical and balanced decision making. Then they can look at price through a realistic lens and not through the sights of personal values and emotions.

Achieving this state of objectiveness is easier said than done because there are mental and emotional humps that can become barriers to doing the work or even being open to thinking about the future. Price and value observations may work against each other creating internal conflict. Objectivity is required to create the best outcome for the owner as well as the business.

The goal for any exit strategy is to improve the success of the transition through plans that are well thought out, defined and actionable. This happens when an owner gets clear on desired outcomes. Think of it as project management with a positive exit being the objective. Project management, like an exit strategy, is accomplished with smaller measurable steps and milestones. One of the crucial steps is determining the price of the business.

While price is about selling, value should never be overestimated. Owners have emotional attachments to their businesses and these come in a variety of forms. Attachments need consideration when deciding to exit the business because they impact the decision to sell or hand over the business. The value of the owner’s endeavours must be honoured, yet the price of the business needs to be realistic.

The difference between value and price often gets in the way of setting an agreed upon price and getting to the stage of handing off the business. Buyers don’t, won’t and ultimately can’t place a dollar amount on the seller’s emotional attachments and personalized value. This leads to the potential for stress, arguments and deals may fold when it is difficult to respect both points of view.

Numbers vs. Opinions:

Price: The price will be determined by financial calculations, formulas, EBIDTA and factual market variables. It will be fairly accurate to market standards if based on these inputs.
Value: The emotional aspect of value can be problematic. Subjective opinions about worth and justification will come from passion and attachment. Creating a selling price from value will be overly high because it is based on opinions.

Market vs. Specialty:

Price: No matter what came before, the current price is based on the current market. The market does not hand out medals but makes sure to categorize – apples must be compared to apples and one is not necessarily any more special than another.
Value: Owners may stay on an emotional level and judge the business as special and very unique, even though it is an apple just like the others. They may view it as special and worthy of a medal. This value will be overly high because it is based on personal bias.

Finance vs. Time Served

Price: The financial aspects trump the mental and emotional. Factors considered in the fair market will include the industry, market, competitors and TSX.
Value: The emotional connection with a business can skew worth. Some owners believe the amount of blood, sweat and tears put into the business should be converted into dollars and jack up the price. Unfortunately this is not relevant to a business deal. This value will be overly high because it is based on dedication, emotion and history.

Exit Strategy Management Should Focus on Value More Than PriceThese three examples are common contentions in calculating business worth. If business owners are stuck on the emotional hump, then expectations, calculations and valuations will be disproportionate to what the financial experts and professionals assess. Disagreement between value and pricing can halt even the best of deals.

Owners need to be honest with themselves and assess their readiness to tackle the emotional piece of the exit puzzle by answering some tough questions.

  1. Am I ready to pass on the business?
  2. Am I ready to do this in 3 to 5 years?
  3. Am I prepared to create a transitional plan with actionable steps to let go, step back and move on?
  4. Am I prepared to keep the personal value out of pricing and let professionals valuate my business?
  5. Am I open to the assessment (good and bad)?
  6. Am I willing to make necessary improvements based on recommendations to increase price rather than believe the business is ideal as it is and hold onto personal, emotional value biases?

If the answers to these questions are no or are met with resistance, then price, value and an exit will be difficult. They are difficult questions and if the answers shift to yes with openness and optimism, then it becomes easier to get to questions about pricing. Answers need to shift to positives before plans can be created. To improve the process and the probability of success:

  1. Do the mental and emotional work with neutral third parties. Family members may be willing, but biases and history (not to mention potential hidden agendas) blur the lines and confuse the focus. Find a professional who specializes in being unbiased and supportive during this type of planning.
  2. Convert conversations into writing. Talk is cheap, especially if no actions result. Ask the professional you choose to work with to provide summaries so conversations, decisions and plans are written, reviewed and tracked. Clarity and commitment are increased when pen is put to paper. It also helps momentum and motivation.
  3. Create a process to measure accomplishments. Whether it is a chart with deadlines or a calendar with commitments and concrete dates, there needs to be a system in place for accountability. This will ensure that as barriers arise, there is no avoidance. Your professional should push for movement or help you to create and implement plan B when needed.

Business owners preparing to exit need to manage the emotional attachments and mental biases before they create challenges when assessing price versus value. Start with the emotional aspects to create readiness before moving on to the more concrete stage of determining price.

Bring in professionals who are experienced and knowledgeable about exit planning so that thinking, talking and actions will occur and change can begin. To improve the probability of its success, your exit plan should be handled like business: objectively, goal focused and prioritized.

If you are an owner who is ready to face the emotional challenges of an exit as well as the financial ones so you can focus on the price of the business check out our Exit Success Program contact us at pam@strategytoexit.com or 604-349-8660. We can work as that neutral third party to support and coach you through successful exit strategy planning.

This entry was posted by Pam Paquet and is filed under Business Owners, Retirement Preparedness. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.