Timing is assessed by evaluating four factors.
The Exit Horizon measures the lead time before the desired exit date. Some business owners may be in a hurry or unforeseen circumstances may necessitate exiting sooner than later (“exit now”). Other entrepreneurs may have time on their side and want to be well prepared – both corporately and personally – for an exit (“prep and exit”). Still other entrepreneurs may take the long view planning to grow the company for the next several years (“grow to the next level and exit”). They want to be prepared, however, and ready to move opportunistically in the event a very attractive offer comes their way or if changes in the industry or broader economy turn in an unfavorable direction. In the first case, the exit horizon could be less than one year, while in the second case the exit horizon could be 1 – 2 years. In the last instance, the exit horizon could be 2-5 years.
The Exit Value consists of two components. The first component is the target valuation desired by the business owner. The second component is the company’s intrinsic value based on a 5 year pro forma Discounted Cash Flow analysis.
The Exit Readiness factor is the degree the company and the business owner are ready based on current conditions and circumstances.
The Exit Potential is the potential for improvement that may be attainable given the Exit Horizon. Companies with a short Exit Horizon will have less opportunity to make adjustments that could improve the company’s exitability, while companies with a longer Exit Horizon could benefit from fixing “low hanging fruit” and implementing other initiatives to improve the overall performance and attractiveness of the company.
An optimal exit time exists when the intrinsic value of the company exceeds the entrepreneur’s target value and Exit Readiness equals Exit Potential.