When it comes to business exit strategies, understanding your financials is not just about planning for you, the shareholders, or your family – it’s about strategic financial planning for your business. In this discussion, we will explore the vital aspects of strategic financial planning, focusing on achieving your desired business exit outcome.
The Gap: Planning for the Desired Outcome
Let’s start with a scenario: imagine your business has opted to sell to a listed company for $10 million, requiring a net profit of approximately $2 million. Achieving this multiple from the listed company is undoubtedly appealing, but it requires meticulous planning. Merely hoping to reach $2 million net profit by some future exit date isn’t a viable strategy. A well-defined financial plan is essential.
The first step is planning your financials year on year. However, this isn’t about adding a percentage to last year’s profit and projecting it as the next year’s budget. Instead, it’s a detailed evaluation of your current financial performance, considering turnover, gross profit margin, overhead costs, and net profit.
Let’s assume you’re currently turning over $5 million and making a net profit of $1 million. If your goal is to achieve a net profit of $2 million within 10 years for a successful exit, you need to increment your net profit by at least $100,000 annually.
Simplified Strategic Financial Budgets
Rather than getting lost in intricate calculations, focus on a high-level budget outlining the desired profit outcome. Consider aspects like turnover targets and gross profit margins. Determine the number of units to sell, staffing requirements, and associated costs. Keep it simple, covering the critical elements of your financial strategy.
Ensure that the growth rate you plan for is sustainable and feasible. Can you fund the projected growth to meet your exit goals? If not, adjustments in your plans or securing additional funding may be necessary.
Your strategic financial planning should align with your business model, chosen exit strategy, and overall goals. The financial model should mirror the value potential of your business, making sure every step leads you towards achieving your exit goal.
Avoiding Unpleasant Surprises
A well-structured financial plan ensures there are no unpleasant surprises. It guarantees that you won’t reach your exit date and realize that the financials didn’t add up, potentially impacting the value of your business in the market.
Strategic financial planning is an essential component of your business exit strategy. It’s about ensuring your financial goals match your desired business outcomes. By aligning your financials with your business model and chosen exit strategy, you increase the certainty of achieving your exit goals and exiting like a true boss. So, let’s delve into your financials, plan strategically, and make your exit a successful reality.