Why you as a Business Owner should know your Exit Score
As an entrepreneur and business owner, it is important to constantly think about the future and plan for success. What is often missing in this planning process is the monitoring of the exit score. The exit score is a measure of the attractiveness of your business to potential buyers or investors. In this blog post you will learn what the exit score is, why it is important and how you can improve it. By the end, you will understand why knowing your exit score is critical to ensuring the sustainable future of your own business.
What is an Exit-Score?
First things first: what is an exit score? An exit score is an indicator of the readiness of both the business and the entrepreneur to sell. Exit readiness is an important concept to understand as an entrepreneur. It refers to when your business is ready to be sold or bought and is a key indicator of your overall financial health.
The term exit readiness was coined by the management consulting firm McKinsey & Company under the title "How to Make Your Business Saleable". In it, the authors noted that businesses with a high degree of exit readiness are more likely to be sold at a higher price than businesses that are not as well prepared. Moreover, companies that are ready to sell are also said to perform better financially. This makes sense: if you know what your business is worth and how much money it will cost to achieve exit readiness, you are likely to be more successful on the road than those who are in the dark.
Exit scores are usually expressed as a number on a scale, with higher values indicating a more attractive investment opportunity. A high exit score can make it easier for a business owner to find buyers or investors, and it can also help to increase the sale price of the business.
Your exit score is the basis for important decisions, such as when to sell or not to sell, how to get the greatest possible sale value for your business, and much more.
How important it is to know your Exit-Score?
As an entrepreneur, it is easy to get bogged down in the day-to-day running of your business. Businesses are dynamic, and as a leader you need to be able to adapt quickly and efficiently. However, one thing that must not fall by the wayside is consciously monitoring your exit score.
If you know your exit score, you can set goals and measure progress against them. You can use this information to adjust your strategy or recognise that it is time to sell your business.
It will also become apparent to you where you should focus your energy and resources. For example, if your exit score shows that there is a lot of room for improvement in one area, it could be the perfect time to respond by hiring new staff or investing in training for existing professionals.
The exit score is a key indicator for planning for the future. It helps them stay on track by providing them with information on the development and potential of your business. They develop a clear understanding of the crucial steps on the way to an exit-ready business.
How to calculate your exit score!
The exit score usually refers to the financial, legal, administrative and personal aspects of a business. These four areas are evaluated with a view to a company's overall readiness for sale (exit).
1. Financial Stability
Are you financially sustainable on the road?
This section is usually used to evaluate the financial health and sustainability of a business. For example, the company's financial statements, tax returns and other financial records are reviewed to assess whether the company is a sustainable business.
Some key factors that may be considered in this section are:
- Revenue and profit: Is the business generating enough revenue to cover its expenses and generate profit for the owners? Is the business profitable and are the trends positive?
- Cash flow: Does the business have sufficient cash to meet its financial obligations and support future growth? Are there any impending debts or financial obligations that could burden the company?
- Financial reporting and forecasting: Does the company have realistic financial forecasts that show a path to sustainability?
- Return on investment: Is the return on investment in the business reasonable for stakeholders?
- Competitive environment: How does the company's financial performance compare to other similar companies in the industry?
It is important that sustainability is assessed in relation to the industry, region, business model and scenario. A company that has positive financial indicators may still not be sustainable due to the competitive environment or industry upheaval.
This part of an exit score therefore indicates whether a company has a solid financial foundation and is likely to be successful in the future. Many business owners and investors use this type of analysis to determine if the company is a good investment opportunity.
2. Management Team
Have you identified your key people? Do they know their roles and are they willing to commit?
A strong management team is critical to the sale of a business. A buyer wants assurance that the business has a team that can continue to run and grow the business after the sale. Here are some points to consider when assessing the readiness of your management team:
- Key people: Have you identified key people who can take on a leadership role if you leave the business? This may include managers, executives and department heads.
- Roles and responsibilities: Do your key employee:s know their roles and responsibilities, and are they willing to take on additional tasks if needed? Clear job descriptions and responsibilities are important to avoid confusion and maintain continuity.
- Succession planning: Have you arranged succession for key positions in the company? This is important to ensure a smooth transition if the current leadership team is not fit to continue with the company.
- Training and development: Have you provided your key employees with the training and development they need to take on leadership roles? This includes both technical and soft skills such as leadership and communication.
- Retention: Are your key employees willing to stay with the company after the sale? If not, this could be a problem for a potential buyer.
Overall, a strong management team can increase the value of the business and make it more attractive to potential buyers. It is important to ensure that your key people are known, know their roles and responsibilities and are willing to take on additional tasks if needed.
3. Legal Aspects
Is the business saleable or are there legal barriers to an acquisition?
When it comes to the legal aspects of selling a business, there are some factors that may affect the saleability of the business and prevent an external buyer from taking over the business. These include:
- Contracts and agreements: The business may be bound by contracts and agreements that an external buyer may see as a disadvantage. For example, the business may be tied to a long-term lease or supply agreement that the buyer would have to assume.
- Liabilities and debts: The company may have liabilities and debts that deter an external buyer. For example, the business may have outstanding legal proceedings or unresolved tax liabilities that would need to be resolved before a sale.
- Intellectual property: The company may have intellectual property such as patents, trademarks or copyrights that are not properly registered or protected. This makes it difficult for an external buyer to take over the company.
- Legal structure: The legal structure of the business, e.g. a corporation, partnership or limited liability company, may affect the saleability of the business as it may make it difficult to transfer ownership.
- Regulations and compliance: The business may be subject to regulations and compliance laws that affect the saleability of the business. For example, a company in the medical or financial industry may be subject to specific regulations and compliance laws that make it difficult for an outside buyer to acquire.
These are not necessarily deal breakers. But potential buyers assess the legalities and carry them into the sale negotiations. A lawyer or other legal expert can help the seller identify any legal hurdles and ensure that all appropriate steps are taken before the sale.
4. Personal Readiness
Are you ready to let go and go through with it?
When it comes to selling a business, personal readiness is just as important as the readiness of the business itself. Below are some points to check to assess your personal readiness to sell:
- Emotional readiness: are you emotionally ready to let go of the business you have built? Selling a business can be an emotional process and it is important to be prepared for the feelings of loss and attachment that can sprout up with letting go of the business.
- Financial readiness: Do you have a clear plan for how you will use the proceeds from the sale of the business? It is important to have a financial plan to ensure that you are financially secure after the sale.
- Career readiness: Do you see any other career or business prospects after the sale of the business? It is important to have a plan for what you will do professionally after the sale so that you are not left without a goal and direction.
- The timing: Is it the right time to sell your business? For example, is the market favourable for a sale, do you have an interested buyer, and is your business ready to transition
- Professional help: have you considered hiring a professional team (lawyers, accountants, business brokers) to support you throughout the process? It is important to have the right team to help you navigate the complex process of selling your business.
Also bear in mind that the process of selling a business can be lengthy and gruelling and it takes perseverance to see it through. It is also important to be realistic about the various steps involved and have a clear understanding of the legal and financial aspects of the transaction.
Improving your exit score
As explained above, your exit score is important to you as an entrepreneur. It is one of the most relevant factors in determining your entrepreneurial success.
If you are an entrepreneur, you know how important it is to have a plan - you cannot just hope for the best. You also need to ensure that there is something of value for the next owner or management team when you sell or give up your business.
In the early stages, however, it is difficult to predict what the future holds. Many entrepreneurs don't think about their exit score until it's virtually too late. But this is exactly why knowing your exit score up to date is so important: if you deal with your exit score early on, you can create a more profitable transition when the time comes.
A high exit score is an important indicator of a company's viability. But how do you determine your exit score and how can you improve it? First of all, you need objective indicators. And this is where our Exit-Score® Test comes into play! It offers you an easy way to collect all your key figures in one place to get a comprehensive profile of strengths and weaknesses. On this basis, you can then focus on improving your exit score. If you wish, we can accompany you through the process as a kind of personal trainer on the phone.
The continuous optimisation of your company's sales value is one of the most important management tasks. Our Exit-Score® Test was developed to help entrepreneurs, start-ups and SMEs to identify their blind spots and to be able to take immediately implementable measures for improvement.
As an entrepreneur, it's easy to get lost in the day-to-day demands of running a business. But at some point you have to take a step back and ask yourself: is this what is best for me, my family, my business and my future?
An exit assessment helps you answer these questions. It helps you identify your options and whether or not it's time to step down from your current role as owner.
To get an exit score, you need to know not only what is happening to your business, but also what is happening to you. And once you have this information at your fingertips, it will be easier than ever to make beneficial decisions for both your personal life and your professional life.
It is important that you are honest with yourself about your emotional and financial readiness, and that you are realistic about how much time, effort and commitment it will take to see the sales process through.
Take some time to honestly examine your exit score. You may not be as prepared as you thought. Dealing with your exit score today could save you a lot of stress later.
If you would like to calculate your personal Exit Score now, you can do so directly by following this Link (Exit-Score® is a registered trademark of Dr. Felix Tschopp).
If you are interested in this topic, I would be happy to discuss it with you in an initial, non-binding meeting. Just leave me a message under the following link and I will get in touch with you.
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