As an entrepreneur and business owner, it is important to constantly think about the future and plan for success. What is often missing from this planning process is monitoring your exit score. The exit score is a measure of the attractiveness of your company 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 of it, you will understand why knowing your exit score is crucial to sustainably ensuring the future of your own company.
First things first: what is an exit score? An exit score is an indicator of the readiness of both the business and the business owner to sell. Exit readiness is an important concept for business owners to understand. It refers to the point at which 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 management consulting firm McKinsey & Company in a paper titled ‘How to Make Your Business Saleable’. In it, the authors found that businesses with high levels of exit readiness were more likely to sell for a higher price than businesses that were not as prepared. Furthermore, businesses that are ready to sell are also likely to perform better financially. It makes sense: if you know what your business is worth and how much it costs to achieve exit readiness, you are likely to be more successful than those who are in the dark.
The exit score is usually expressed as a number on a scale, with higher scores 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 increase the selling price of the business.
Your exit score is the basis for important decisions, such as when you should or shouldn't sell, how to get the most selling value for your business, and more.
Why Knowing Your Exit Score is Important
As a business owner, it's easy to get caught up in the day-to-day operations of your business. Businesses are dynamic, and as a leader, you need to be able to adapt quickly and efficiently. However, one thing that should not be neglected in the process is consciously monitoring your exit score.
Knowing your exit score allows you to set goals and measure progress against those goals. You can use this information to adjust your strategy or recognise that it is time to sell your business.
It will also show 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 the training of existing professionals.
The exit score is an essential indicator for future planning. It helps you to stay on the right track by providing you with information on the development and potential of your company. You develop a clear understanding of the crucial steps towards an exit-ready company.
How to Calculate Your Exit Score
The exit evaluation typically covers the financial, legal, administrative and personal aspects of a business. These four areas are evaluated with an eye to the overall readiness of a business for sale (exit).
1. Financial Stability
This section typically serves to evaluate the financial health and sustainability of a business. This involves examining the company's financial statements, tax returns and other financial records, for example, to assess whether the company is on a sustainable footing.
Are you financially sustainable?
Some key factors that may be considered in this section include:
- Revenue and profit: Is the company generating enough revenue to cover its expenses and generate profit for owners? Is the business profitable and are the trends positive?
- Cash flow: Does the business have enough cash to meet its financial obligations and support future growth? Are there any looming debts or financial obligations that could weigh on the business?
- Financial reporting and forecasts: Does the business have realistic financial forecasts that show a path to sustainability?
- Return on investment: Is the return on investment in the company reasonable for stakeholders?
- Competitive environment: How does the company's financial performance compare to other similar companies in the industry?
It is important to assess sustainability in relation to the industry, region, business model and scenario. A company that shows positive financial indicators may still be unsustainable due to the competitive environment or upheaval in the industry.
This part of an exit score, therefore, provides information on whether a company has a solid financial foundation and is likely to continue to be successful in the future. Many business owners and investors use this type of analysis to determine whether the company is a good investment opportunity.
2. Management Team
A strong management team is essential when selling a business. A buyer wants to be sure that the company has a team that can continue to operate and grow the business after the sale.
Have you identified your key people? Do they understand their roles and are they ready to commit?
Here are some points to consider when evaluating the readiness of your management team:
- Key personnel: Have you identified key personnel who can take on a leadership role in the event of your departure from the company? This may include managers, executives and department heads.
- Roles and responsibilities: Do your key employees understand their roles and responsibilities, and are they willing to take on additional tasks as needed? Clear job descriptions and responsibilities are important to avoid confusion and maintain continuity.
- Succession planning: Do you have a plan for succession in place for key positions in the company? This is important to ensure a smooth transition in case the current management team is not suitable to continue the business.
- 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 company and make it more attractive to potential buyers. It is important to ensure that your key people are known, understand their roles and responsibilities, and are willing to take on additional responsibilities if needed.
3. Legal Aspects
When it comes to the legal aspects of selling a company, there are a number of factors that can affect the company's saleability and deter an external buyer from taking it over.
Is the company for sale or are there legal barriers to an acquisition?
This point covers the following aspects in particular:
- Contracts and agreements: The company may be bound by contracts and agreements that an external buyer views as a disadvantage. For example, the company may be bound by a long-term rental or supply contract that the buyer would have to take over.
- Liabilities and debts: The company may have liabilities and debts that deter an external buyer. For example, the company may have outstanding legal proceedings or unresolved tax liabilities that would have to be settled before a sale.
- Intellectual property: The business may have intellectual property, such as patents, trademarks or copyrights, that are not properly registered or protected. This makes it more difficult for an outside buyer to take over the business.
- Legal structure: The legal form of the business, such as a corporation, partnership or limited liability company, may affect the business's saleability because it may complicate the transfer of 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 special regulations and compliance laws that make it difficult for an external buyer to take over.
These issues don't necessarily have to be deal breakers, but potential buyers will evaluate the legal situation and bring it into the sales 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
When it comes to selling a business, personal readiness is just as important as the readiness of the business itself.
Are you ready to let go and follow through?
Here are some points to consider when evaluating your personal readiness to sell:
- Emotional readiness: Are you emotionally ready to let go of the business you built? Selling a business can be an emotional process, and it's important to be prepared for the feelings of loss and attachment that may arise when 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.
- Professional readiness: Do you see yourself in a different professional or business perspective after selling 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 or 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 for a transition?
- Professional help: Have you considered hiring a professional team (lawyers, accountants, business brokers) to support you throughout the entire process? It is important to have the right team to help you navigate the complex process of selling your business.
Also, keep in mind that the process of selling a business can be long and arduous, and it takes stamina to see it through. It is also important to have a realistic assessment of the various steps and a clear understanding of the legal and financial aspects of the transaction.
Improve 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 can't just hope for the best. You also need to make sure that there is something valuable for the next owner or management team when you sell or give up your business.
But in the early stages, it's difficult to know what the future holds. Many business owners don't think about their exit score until it's almost too late. But that's why knowing your exit score now is so important: by addressing your exit score early, you can make 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? To do that, you first need objective metrics. And that's where our Exit-Score Test comes in! It provides you with an easy way to capture all your metrics in one place for a comprehensive profile of your strengths and weaknesses. On this basis, you can then focus on improving your exit score. If you wish, we can guide you through the process as a kind of personal trainer on the phone.
Continuously optimising the sales value of your company is one of the most important management tasks. Our Exit-Score Test was developed to help entrepreneurs, start-ups and SMEs identify their blind spots and take immediate action to improve them.
Conclusion
As an entrepreneur, it's easy to get lost in the day-to-day demands of the business. But one day you have to take a step back and ask yourself: is this best for me, my family, my company, and my future?
An exit assessment will help you answer these questions. It will help you see your options and figure out whether or not it's time to leave your current role as an 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 that information at your fingertips, it will be easier than ever to make beneficial decisions for both your personal and professional life.
It is important that you are honest with yourself about your emotional and financial readiness, and that you realistically assess how much time, effort and commitment it will take to complete the sales process. Take a little 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.
Want to Learn More?
If you are interested in this topic, I would be happy to discuss it with you.
Just leave me a message and I will contact you.
