How much time in advance a business owner should begin planning for an exit depends on numerous factors. Allowing one to three years prior to the actual exit serves as a good general guideline. This time frame provides sufficient time to prepare both the company and the business owner.
Exits can be placed into three time frames:
- Exiting “now” is applicable when personal or corporate circumstances dictate that time is of the essence. Several very legitimate reasons can warrant taking an expedited path to an exit. For instance, there could be a change in the health condition of the business owner or a pending regulatory change. The main drawback of exiting “now” is that there is little time to prepare the company and implement changes that could raise the company’s value and minimize “surprises” during the transaction process. This time frame also compresses the time to properly address personal goals. An expedited exit still takes time to execute and typically ranges from six to twelve months.
- “Prep and exit” is the preferred time frame for most situations. The majority of companies can benefit from fixing “low hanging fruit” and making other “quick” changes that positively affect a company’s valuation and preparedness. Devoting additional effort in targeted areas has the potential to build even more value and to further enhance the likelihood of getting a deal done on favorable terms. The nature of these value-building efforts also depend on the exit option that is being executed. (For more information on building value prior to an exit, click here.) A period of one to two years typically provides sufficient time to fine tune a company prior to an exit and to allow the business owner to properly address personal goals.
- “Growing to the next level” is a value-maximizing strategy allowing ample time to finely tune the company and for the owner to be fully prepared for a transition. A company’s size in terms of revenue and profitability has a direct bearing on its valuation. Understanding how a medium-sized company is valued is the first step to building a more valuable company and developing a road map to take the company to the next level. (For more information on valuing private companies, click here.) In most cases, growing to the next level takes two to five years.