One of the biggest assets on entrepreneurs’ personal balance sheets is their business. Yet, I have observed that many do not integrate it with their own personal wealth planning, depending solely on their personal assets to fund the life goals they want to achieve. To be fair, this is not an easy task even for wealth advisers. I mean, how do you estimate the value of businesses in private markets in say, 10 years?
For listed securities, at least there is enough data for us to estimate their expected returns. And then, there is the need to determine when owners will exit from their businesses. But business owners are so busy ensuring that their enterprise survives the infant years and then when it does, they focus on profitability and growth, leaving no time to consider retirement. Working professionals are more likely to be able to tell us their preferred retirement age than business owners because they seldom think about exiting, for the company that they have built is their “baby”! All these make planning very difficult.
But the truth that business owners need to hear is that whether they like it or not, they all will have to exit one day whether due to death, poor health or retirement. Without planning in advance, they may not be able to extract the best value from what they have built, there may not be successors to them and the business may ultimately fail, and their employees and customers will not be cared for.
What Does a Good Business Exit Plan Look Like?
There are 3 areas to consider in a comprehensive business exit plan.
1. Financial
Business owners first need to have a comprehensive wealth plan to establish the capital required for them to enable their life goals at different life stages. After considering their personal assets, we need to determine how much their business value ought to be in order to close the gap.
For example, let’s just say a business owner needs S$20 million in capital to enable their life aspirations. If their personal assets are going to be worth S$8 million, then their share of the business needs to be worth S$12 million. We then need to determine the current value of their business to establish the value gap. So, if their share of the business is worth S$5 million today, the value gap is S$7 million. It is also possible that business owners may not want to sell their business when they retire but instead continue to be shareholders after handing over leadership. If this is the case, then the wealth plan needs to address the income gap between what they need and the income that their personal assets can give them. Their business exit plan will then need to address how they can derive a stable source of income as shareholders.
The financial aspect is also about putting in place legacy and estate plans to capture the fair value of the business when their health fails or when they are demised.
2. Business
The business aspect is about putting in place strategies to close the value gap or income gap that was established earlier. When establishing the value of a business for the purpose of a buy-sell transaction, we will use various methods such as discounted cashflow of projected future earnings or revenue and also use market comparables to arrive at the value of the business. Industry norms such as Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) or revenue multiples are then used for sense checking against the resulting valuation. In my industry, a percentage of Assets Under Management (AUM) is also used for this purpose. So, for example, if an industry norm is between 3 to 7 times EBITDA and if the EBITDA of the company is S$5 million, a valuation of S$15-$35 million would be acceptable.
But I have done several transactions before and I know that the actual amount is really decided between willing buyers and sellers. So, to convince buyers to move closer to the higher end of the multiples, business owners need to work on the “4Cs” of their business.
The “4Cs” of a Business
- Human Capital – which is about having plans to hire, reward, and retain talents and a clear succession plan.
- Customer Capital – which is about having the right spread of customers so that revenues are more reliable instead of depending on one or two big customers. It is also about creating unique value in your offerings such that the business is hard to replace.
- Structural Capital – which is about building strong systems, technology and processes in place as well as having intellectual property protection.
- Social Capital – is the software of the company. It is about building a strong culture and creating a work rhythm in the company. It is also about brand-building.
3. Personal
The personal aspect is perhaps the most neglected. To many business owners, the company is their life’s work and their identity. They cannot imagine exiting it and that is why many business owners do not plan for it.
In the 2023 National State of Owner Readiness Report done by Exit Planning Institute in the US, when 1162 of the survey participants in the US were asked about their readiness to exit from the business, on average, only 36% of business owners indicated an above average personal readiness. To have a successful exit, there is a need to have a written plan on what life should be after the business and actively work towards it.
My Own Business Exit Plan as CEO of Providend
Years ago, I started my own exit planning journey. The company was growing well and as the founding team advanced in years, I felt it was the right time to think about succession. Some clients were also naturally concerned about the future of the firm. So, I cast a 10-year vision for the firm, setting a timeline for when I would hand over leadership and ownership.
I decided on the target valuation of the firm based on what I hope the smallest working and founding shareholders should get when they retire from the firm. Then I put in place a 10-year strategy to achieve the financial milestones as well as build the 4Cs (mentioned above). I shared the vision with the staff as well as clients regularly.
Personally, I am deeply grateful to God for where I am today. I never would have imagined 25 years ago that the son of a bus driver could advise affluent families and manage in excess of $1 billion. Because I have been an underdog.
When I finally retire from financial services, I hope to coach and encourage the disadvantaged, the underdogs and corporate executives who are burnt out. I have been preparing myself for the day of my business exit.
The biggest benefit of a comprehensive exit plan is that it provides clarity. Not only was I able to reject a few offers to acquire us, but we have been experiencing exponential growth in the last four years.
The writer, Christopher Tan, is Chief Executive Officer of Providend Ltd, Southeast Asia’s first fee-only comprehensive wealth advisory firm and author of the book “Money Wisdom: Simple Truths for Financial Wellness“. He is also a Certified Ikigai Tribe Coach.
The edited version of this article was published in The Business Times in May 2024.
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