As a business owner, planning for an eventual exit is essential. Even if selling your business may seem far off, proactive planning can help ensure you maximize your business’s value. After all, your business is likely your largest asset. To achieve a successful and satisfying exit, you should ensure that your business is ready for you to exit and that you are ready to leave your business. 

A significant part of preparing yourself to exit your business lies in determining what you want from the transaction, which often differs depending on your reason for selling. Like it or not, no matter what you believe your company to be worth, the market itself is the ultimate judge of business value. Getting clear on what you want from the transaction is the first step in evaluating whether there is a gap between the minimum number you would accept in a sale and the maximum number a potential buyer would be willing to pay. 

Figure Out Your Number

The first step in determining what you need from the transaction is understanding your reason for exiting. A business owner may decide it’s time to sell for many reasons. For owners who have dedicated most of their lives to building one successful company, the most common reason is they are ready to retire. 

Most business owners value freedom and autonomy above all else. That’s why you started a business rather than working for someone else. If you sell the company, you want the financial freedom to do whatever you want, when you want, within reason.

Suppose you are stepping away from your business to enjoy your retirement. In that case, ensuring you have the means to provide reliable cash flow to fund your lifestyle is crucial. But how do you know what that number is?

Here’s your guide.

STEP 1: CALCULATE YOUR RETIREMENT INCOME NEEDS

What lifestyle do you plan to maintain throughout your retirement years? Budget your annual retirement income needs. If you don’t have a detailed budget, it is always better to overestimate your yearly needs to help ensure that your money will last for the rest of your life.

Consider any other goals you believe are essential to enjoy a fulfilling life. Taking care of your heirs, quality of life desires (homes, boats, travel, etc.), gifting to causes you care about.

STEP 2: DETERMINE THE OTHER SOURCES OF INCOME YOU’LL HAVE

Your business income won’t be there to fund your needs, but you’ll likely have other sources of income. Perhaps you purchased investment real estate and will have rental income. Most will have social security income. Determine all your sources of income before withdrawing money from your financial assets.

STEP 3: DETERMINE THE VALUE OF YOUR ASSETS BUILT UP OUTSIDE OF YOUR BUSINESS

While your business is likely your largest asset, you probably accumulated additional wealth in investments outside your business: retirement plans, brokerage accounts, savings, and other assets. Don’t include your primary residence.

STEP 4: CALCULATE WHAT YOU NEED FROM THE BUSINESS SALE TO MEET YOUR RETIREMENT INCOME NEEDS GOAL

Once you’ve determined your needs, sources of income, and value of your investable assets accumulated outside of your business, you could construct a Lifetime Cash Flow Plan. The resulting plan could help you determine the minimum number you need to sell your business for true financial freedom.

Don’t forget to account for taxes on the income you need to fund your needs and wants because it could be your most significant single-item expense during your retirement. The tax code applies various tax rates on different sources of income. Figuring this out accurately using a legal pad or spreadsheet is nearly impossible. 

An elite wealth manager can help you construct a Lifetime Cash Flow Plan with sophisticated software.

STEP 5: DETERMINE THE “FRICTIONAL” COSTS OF THE BUSINESS SALE

There are fees associated with a business sale. You will likely want to bring in other professionals to facilitate the sale of your business and account for the additional expenses required to sell the business. Those professionals often could include at least one of the following:

• Business Broker: Assist with the sale of a small business. They usually charge a percentage of the sale price, often using a tiered fee schedule. Typically, you will see the following fees – 10% on the first million, 8% on the second million, 6% on the third million, etc. 
• M&A Professional: Assist with the sale of a mid-sized business. Companies selling for over $10 million will require an M&A Professional to facilitate the sale. The business owner can expect to be charged a fee of 3% to 5% of the sale price.
• Investment Banker: Assist with the sale of a large business. Companies selling for over $100 million usually require an investment banker to facilitate the sale. The business owner can expect to be charged a fee of $3% with a minimum of $500 million.
• Legal Professional: Handles the negotiating, drafting, and revisions of the contract on your behalf. 2% to 4% of the sale price in legal fees is typical.

For example, let’s say you sell your business for $5 million.

Intermediary fees 

Approximately $300,000

Legal Fees 

$5,000,000 x 3% = $150,000 

Total Professional Fees charged = $450,000

Your before-tax (gross) proceeds = $5,000,000 – $450,000 = $4,550,000

Make sure the sale price is not a number in your head. It should come from a market valuation of your company – an amount a buyer would be willing to pay for your company. As we have discussed before, business owners often have a biased view regarding the value of their company. The reality is that until you get a valuation of your business, the number you believe it is worth is more than likely higher than someone is willing to pay for it. 

STEP 6: DETERMINE THE TAX YOU WILL PAY ON THE BUSINESS SALE

When you sell your business, the amount of tax you must pay will vary based on the tax rules in your jurisdiction and the transaction’s structure. You’ll likely have a combination of taxes, including federal and state capital gains, ordinary income, depreciation recapture on assets, etc. 

It’s a good idea to consult advisors knowledgeable in tax mitigation before negotiating the transaction structure to discuss strategies for reducing your tax obligations. After you already negotiated the deal, it may be too late to minimize taxes. This step can make a meaningful difference in your net after-tax proceeds.

For example, let’s say you pay 20% in total taxes.

Total tax due = $5,000,000 X 20% = $1,000,000

Note: Some frictional costs, such as legal fees, may be tax deductible, but transactional fees are not under current tax law.

STEP 7: CALCULATE THE NET SALE PROCEEDS AFTER FRICTIONAL COSTS AND TAX

Subtract the total frictional costs and tax from the sale price to determine the net sale price after tax.

For our example, $5,000,000 – $450,000 – $1,000,000 = $3,550,000 Net Sale Proceeds

So, the big question: Is $3,550,000 equal to or greater than your number from step 4? If the answer is “yes,” then congratulations! You have met your Freedom Point. 

Most business owners should perform this exercise periodically, even if they’re not thinking about selling soon. If you’re beyond your Freedom Point, you’re taking risks by continuing to run your business. That doesn’t mean you have to decide to sell, but you want to know this fact and probably plan additional protections around this valuable asset in your life.

If the answer is “no,” the net proceeds from your business sale are insufficient to provide financial freedom; you have some work to do. 

The upshot is that you have options for increasing your business’ value:

1. The most overlooked aspects of determining business value are often within your control. Based on our analysis of 1,511 business owners and their companies, the owner’s personal reason for exit and the actions they have personally taken to exit can predict up to 53% of the difference in the value of two seemingly similar firms. Developing a personal action plan can potentially increase a $5 million sale price to over $7.5 million. Get Your Personal Readiness to Exit Score 
2. Most business owners focus on their own business value metrics, not on the eight key metrics that a buyer will use to value it. After analyzing more than 50,000 business owners who completed a value builder questionnaire, we found the average business achieved a score that values their business at 3.5 times pre-tax profit. Improving your value builder score from average (59) to 80 potentially increases your selling price by 71% to 6.1 times pre-tax profit, or from $5 million to over $8.5 million. Get Your Value Builder Score

Together, your actions to prepare for exiting and your score on the eight valuation metrics from a buyer’s perspective can increase your business value 2.6 times. With proactive planning, a $5 million business value could become more than $13 million.

**IMPORTANT DISCLOSURE**

Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.

As a business owner, you’ve poured your heart, soul, and countless hours into building and growing your enterprise. Yet, there comes a point in every entrepreneur’s journey when the prospect of an exit becomes a reality. Whether retirement beckons, a new venture awaits, or life takes unexpected turns, planning for a seamless business transition is paramount.

Exit Planning: A Necessity, Not an Option

No matter how deeply rooted your commitment to your business, the reality remains that you’ll exit one day. Embracing this certainty and planning for it can turn a potentially daunting process into an opportunity for growth and prosperity. By proactively strategizing your exit, you shift from exiting by default to exiting by design. This shift empowers you to shape the legacy you leave behind and to maximize the value of the business you’ve dedicated your life to building.

The Dual Role of Personal Factors

We universally acknowledge that determining a business’s value is a scientific process. Many individuals think that evaluating a business’s worth necessitates a comprehensive examination of its financial records, an assessment of the market, and various other forms of quantitative analysis. 

Many owners frequently disregard other vital elements when assessing their business’s value that pertains to the owner and their intentions, the reasons for their departure, and the actions taken to prepare the company for transition. The owner’s motive for exiting and their preparatory measures towards departure can significantly impact the value of their business.

When comparing two similar businesses, if each owner possesses different motivations for exiting and different exit preparation strategies, their business values will likely differ significantly. These factors combined can produce approximately 53% of the disparity in value between two otherwise similar businesses.

Reasons For Exiting

Your motivation for stepping away from your business holds significant sway over the manner and timing of your exit. We can categorize these reasons into three distinct groups that contribute to the business’s overall value.

1. Personal Motivations 
   
   The exit reasons include your desire to diversify wealth, cash out, or embark on a new venture. For instance, you might dream of exploring uncharted entrepreneurial territories or pursuing other investments that align with your evolving financial goals.
   
   The business holds greater value when the proprietor is internally driven to embark on a fresh endeavor or phase in their life. One could infer that this group of owners has achieved their self-established objectives for both themselves and the company, motivating them to move on to the subsequent stage of their lives.
   
   Selling for personal motivations is exiting by design.

2. Personal Crisis: 
   
   Burnout, health issues, stress, or family crises can all precipitate a need for an unplanned exit. Such situations underscore the importance of proactive planning even if you don’t intend to sell for many years. It helps in anticipating unforeseen challenges and implementing strategies to mitigate their impact.
   
   When an owner exits due to a personal upheaval, it adversely affects the business’s value. The company is unprepared to transition to a new owner, and a potential buyer will discount its value.
   
   Selling for personal crisis reasons is exiting by default.

3. Personal Peaked: 
   
   The feeling of having reached your peak in the business can also spark an exit. Perhaps you’re yearning for more time to indulge in hobbies, spend time with your family, travel, and focus on health, or you’re contemplating retirement after a fulfilling journey. 
   
   When the owner believes they have reached their personal pinnacle, the factors driving their departure can impact business value. For example, a strategic buyer may take the company you’ve built to a higher level and continue building your legacy. They may have a deeper management team or can add your products or services to their offerings for their more extensive customer base.
   
   Selling because you personally peaked is exiting by design.
   
   Each category plays a distinct role in influencing the business’s value, whether by enhancing its attractiveness to buyers or affecting its overall operational stability[1]. You’ll likely get significantly more value if you plan to exit by design rather than being forced to leave by default.

Personal Readiness to Exit

Your preparedness to exit is equally pivotal. Preparing both yourself and your business for the transition will significantly impact the outcome. Proactively planning for an eventual exit, regardless of the timeline, can substantially affect your business’s value. 

There are four main areas to focus on:

1. Personal Financial Goals: 
   
   Business owners often consider their businesses as part of their family. They have difficulty assigning a value to the company, similar to not being able to set a monetary value for their children. Some business owners perceive their businesses as priceless and focus on the highest offer they might receive rather than the lowest offer they would be willing to accept. We define the “minimum number” as the lowest amount a business owner would be willing to take to exit the company without any regrets. Owners who have considered their minimum number tend to build businesses around 5-6% more valuable.
   
   Interestingly, the owner doesn’t necessarily have to validate the accuracy of their minimum number to have a more valuable business. Simply contemplating this figure seems to help the owner prepare for an exit, resulting in a more valuable company.
   
   Action Item: Determine your minimum number for exiting the business.

2. Personal Life and Social Goals: 
   
   Like how parents raise their children, particular owners dedicate a significant portion of their time to their enterprise, often exerting over 60 hours per week within their organization. They establish camaraderie with their staff, welcoming them into residences and commemorating significant occasions such as their employees’ marriages. Owners who recognize the potential implications of their departure on their social life seem to possess a more valuable business.
   
   Action Item: Evaluate the extent to which your business and personal life are intertwined and what adjustments might be needed to facilitate the transition.

3. Involvement After Exit: 
   
   Many owners think leaving will be easy. Like selling a home, they’d relinquish the keys and receive a hefty sum. However, exiting a business is significantly more involved than selling property. The greater the owner’s willingness to remain engaged post-departure, the higher the company’s perceived value. An owner receptive to alternative avenues beyond handing over the keys garners a business appraised 4-5% higher. Buyers are inclined to offer extra compensation for the owner’s involvement during the transition.
   
   Action Item: Determine your desired level of engagement post-transaction, whether you want to stay involved or fully step away.

4. Employees’ Well-being: 
   
   New parents frequently contemplate the prospects of their children, including their career, family, and personal aspirations. They think about the potential effects of their parenting style on their children’s lives. Similarly, many owners are concerned about their employees’ treatment once they depart. Some owners develop strategies to express gratitude to their staff, while others negotiate with the buyer to ensure the well-being of their employees. Crafting a thoughtful plan and considering the welfare of the employees seems to result in a 17-21% increase in business value, irrespective of whether they communicated the exit plans to the employees.
   
   Action Item: Formulate strategies to express gratitude to your staff and develop a plan to put in place for your employees’ future, ensuring a smooth transition and fostering their continued success.

Conclusion

In the realm of business ownership, exits are inevitable. Yet, your approach to these exits can transform them from apprehensive farewells to triumphant transitions. By proactively planning for your eventual exit, aligning your motivations, and preparing yourself and your business, you can ensure a successful exit by design, not by default. Remember, each step you take today can shape the value and legacy you leave behind, ultimately paving the way to your financial freedom.

**IMPORTANT DISCLOSURE**

Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.

Are you a business owner who dedicated your career to building a successful company? As you approach the possibility of selling your business, it’s crucial to position it strategically for maximum value in the eyes of potential buyers. 

Imagine a future where the legacy of your hard work and dedication lives on, not just in the memories of your customers and employees but also as a thriving enterprise that continues to flourish under new leadership. Whether you’re considering selling your business now or in the distant future, taking proactive steps to increase its value is investing in your legacy.

The Mindset Shift: Embracing the Buyer’s Perspective

As an entrepreneur who has dedicated a significant portion of your career to nurturing and growing your business, you probably believe that company value is primarily determined by growth, profitability, and historical performance. These factors are ingrained in the perception of your business’s worth. However, the reality often falls short of expectations compared to business value from a buyer’s perspective.

Understanding that financial metrics are only part of the equation when evaluating your company’s value is critical. As hard as it can be to accept, a business is only as valuable as the potential buyer perceives it. Expectations can fall short since buyers and sellers often have divergent perspectives on business valuation. Buyers assess various aspects of a business that you might not consider crucial value determinants. Sellers tend to focus on their emotional connection to the company, growth, profitability, sustainability, and historical performance. A pragmatic evaluation of its potential drives buyers. Understanding this contrast is the first step toward aligning your strategies with buyer expectations.

As you contemplate selling your business, it’s time to pivot and start seeing things from a buyer’s perspective. What are the factors that potential buyers prioritize when evaluating a business? How do these considerations differ from the factors driving your valuation decisions so far? Let’s delve into this shift in perspective.

The 8 Drivers of Business Value from a Buyer’s Perspective:

1. Financial Performance: Beyond the Bottom Line

Buyers, just like you, scrutinize financial statements. However, their evaluation goes beyond mere numbers. They seek consistency, stability, and growth potential. Demonstrating a track record of solid financial performance while also highlighting avenues for future growth can significantly enhance your business’s value in the eyes of a buyer.

Example: A company with steady growth in revenue and profitability, even during economic downturns, is more appealing to potential buyers.

2. Growth Potential: Planting Seeds for Tomorrow

Buyers often invest in what a business can become, not just what it is today. Showcase your strategies for expansion, new markets, and innovation. Paint a picture of a company with untapped potential, and you’ll captivate buyers looking for a fruitful investment.

Example: A company that can pivot and capture new market opportunities, ensuring long-term growth potential.

3. The Switzerland Structure: Dependence vs. Diversification

Buyers appreciate a well-diversified customer and supplier base. It can raise concerns if your business is overly reliant on a single client or a small group of customers. Prioritize diversifying your revenue streams to mitigate risks and appeal to buyers seeking stability.

Example: A manufacturing company with a well-distributed customer base across various industries, reducing dependency on any single sector.

4. The Valuation Teeter-Totter: Balancing Risk and Reward

Buyers meticulously weigh risk factors against potential rewards. Address any legal, operational, or financial vulnerabilities that might deter buyers. You’re positioning your business as an attractive proposition by minimizing risks and maximizing opportunities.

Example: A software company that has secured long-term client contracts, guaranteeing a steady revenue stream.

5. The Hierarchy of Recurring Revenue: Building Predictability

Recurring revenue is the heartbeat of business stability. Buyers seek dependable income streams, often placing a premium on subscription models, contracts, or repeat clientele. Showcase the reliability of your revenue sources to instill confidence in potential buyers.

Example: A consulting firm that offers retainer-based services, ensuring a consistent monthly income.

6. The Monopoly Control: Power in Your Niche

Dominating your market niche can significantly increase your business’s allure. Buyers are drawn to companies with a competitive edge and strong market presence. Highlight your unique selling points and competitive advantages to reinforce your business’s worth.

Example: A company holding exclusive patents or intellectual property for a valuable product or service.

7. Customer Satisfaction: The Voice of Endorsement

Happy customers are your best ambassadors. Positive testimonials, reviews, and customer loyalty indicate a strong brand reputation and potential for sustained success. A loyal customer base can be a valuable asset for buyers, instilling confidence in the business’s future.

Example: An e-commerce store renowned for excellent customer service and high customer ratings.

8. Hub and Spoke: Depersonalizing the Business

While your leadership has been pivotal in driving the business, buyers often seek assurance that the company won’t crumble in your absence. Establish a capable management team that can operate effectively without your direct involvement. You enhance the business’s attractiveness by decentralizing decision-making and creating a well-oiled machine.

Example: A restaurant chain with a competent management team capable of maintaining consistent operations across multiple locations.

Navigating the Path Ahead

In the dynamic world of business, perspectives on value are constantly evolving. The traditional markers of growth, profitability, and historical performance remain essential but are no longer the sole determinants of a business’s worth. Understanding and embracing the eight key drivers of business value from a buyer’s perspective provides a roadmap to enhance your business’s value significantly and can position the company to thrive in the eyes of potential buyers.

Don’t let disappointment in valuation figures hinder your journey toward a successful business sale. Instead, focus on what truly matters to buyers and strategically enhance those aspects of your business. The process may require effort and adjustment, but the reward—a higher and more accurate valuation—will make the journey worthwhile.

As you consider the eventual sale of your business, remember that your role as an owner has now expanded. You’re not just a seller; you’re a visionary preparing to hand over the reins to someone who sees the potential in what you’ve created. Your business’s value is not solely defined by what you’ve built but by the potential it holds in the eyes of those eager to invest in its future. By aligning your business with the factors that matter most to buyers, you’re not only increasing its value but also ensuring a legacy that continues to thrive beyond your ownership.

**IMPORTANT DISCLOSURE**

Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.

How to Ensure Your Business Thrives Without You

As a business owner, you may dream of selling your company in the future, but before you take that step, it’s essential to ensure your business is not solely dependent on you. The Value Builder Score research, which involved 2300 companies worldwide, reveals two critical factors linked to the likelihood of receiving an offer for your business when the time comes to sell.

Factor #1: Surviving the “Hit-By-A-Bus” Test

Imagine if you could not work for three months due to unforeseen circumstances. Would your business continue to run smoothly? If your staff and customers rely heavily on you, it diminishes your company’s value to a potential acquirer. So, making your business more independent and less reliant on your direct involvement is crucial.

One way to achieve this is by reducing your time at the office. Avoid working evenings or weekends, and resist responding to employee calls immediately. This will encourage your employees to make more decisions independently, exposing the strengths and weaknesses of your team.

Additionally, you must view your business as an inanimate economic engine rather than something that defines your identity. This shift in perspective is vital if you intend to sell your business one day. Potential buyers seek companies with well-established processes and systems that can thrive without excessive reliance on the owner’s presence.

Moreover, a business that can continue to grow and operate efficiently without the constant involvement of the owner is more attractive to buyers. They are more likely to perceive it as a secure investment with a higher potential for long-term success, leading to a more enticing offer[1].

Factor #2: The Power of a Management Team

Companies with a well-structured management team, rather than relying on a sole manager, receive offers at almost twice the rate. A strong management team demonstrates the business has effective leadership, making it more appealing to potential buyers.

If you lack a management team, consider hiring a second-in-command (2iC) to help balance the demands of running your company and advance your targeted exit time. Implement a four-step plan for hiring a 2iC, as advised by Bob Sutton, an expert from Silicon Valley:

1. Identify potential candidates from within your organization. Internal candidates tend to outperform external leaders unless the situation is critically unsatisfactory.
2. Give your 2iC prospects a unique project where they can showcase their leadership skills to you and the rest of your team. Their excellence will be apparent to your team, making the selection process more transparent.
3. Communicate your choice to the rest of your team if you pick a 2iC from an internal pool. Simultaneously, show appreciation for the contributions of those you passed over, demonstrating how much their efforts are valued.
4. Shift your management style from being a direct manager to acting as a coach. Encourage the 2iC’s growth and development by asking more questions, listening more, and reducing your time spent on explicit directives.

Having a solid management team in place adds tremendous value to your business. Potential buyers perceive it as a sign of stability, efficiency, and the ability to continue operating effectively even after the current owner has exited the company. This gives them the confidence that the business will maintain its success and profitability in the long term, making it more likely for them to make a generous offer[1].

What Does Value Mean to a Potential Buyer?

For a potential buyer, the value of a business goes beyond just financial metrics. Of course, revenue, gross profit, and cash flow are critical factors, but they are not the only ones. Business owners must understand that buyers seek a well-organized, sustainable, and adaptable business model with the potential for long-term growth.

When your business is less dependent on your presence and expertise, it becomes more attractive to buyers. They see it as an autonomous entity capable of thriving without relying solely on the owner’s skills and knowledge. This independence reassures buyers that the business will continue to operate efficiently even after the acquisition, reducing the perceived risk associated with the investment.

In contrast, a business heavily reliant on the owner may raise concerns for potential buyers. They may worry that the owner’s departure could lead to a significant drop in performance, potentially jeopardizing their investment.

Furthermore, a business with a strong management team showcases capable leaders who can maintain its success after the owner’s departure, reassuring buyers that the company can withstand potential leadership changes and continue its growth trajectory.

Ultimately, potential buyers seek value in businesses that offer stability, growth potential, and the ability to adapt to market changes and challenges. By ensuring that your business can thrive and add value without you, you position it as an attractive investment opportunity, commanding a higher offer price and enhancing your chances of a successful sale[1].

Conclusion

Creating a you-proof business requires careful planning and deliberate actions. By reducing your direct involvement, developing a strong management team, and implementing the above pro tips, you can build a business with lasting value and attract potential buyers who see it as a secure investment.

Remember, buyers seek businesses with sustainable growth potential and the ability to operate independently of the owner. A business that can thrive without you will secure a higher offer and demonstrate your successful legacy as a business owner. Take the necessary steps today to ensure your business is you-proof and ready for a thriving future[1].

Sources: [[1](https://blog.hubspot.com/sales/how-to-run-a-business

**IMPORTANT DISCLOSURE**
Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.

Recently, recurring revenue models have emerged as a powerful strategy for businesses to enhance their financial stability, increase customer loyalty, and attract investors. This article explores the significance of recurring revenue and how traditional companies can leverage it for unprecedented growth and value creation.

Recurring Revenue Success Story: Darden Acquires Ruth’s Chris Steak House

Darden, the renowned Olive Garden restaurant chain owner, made headlines by acquiring Ruth’s Chris Steak House, a legendary American steakhouse, for an impressive $715 million. This move implied a valuation of approximately one times last year’s annual revenue or about ten times their adjusted EBITDA for 2022 [1].

Although the deal was a significant milestone for Darden, it also highlighted an important aspect of valuation – recurring revenue. While Ruth’s Chris Steak House is a remarkable company, its lack of recurring income hindered its value. On the other hand, businesses with recurring revenue streams tend to command higher valuations, as seen in the example of Waste Management, a private garbage collection company with long-term contracts, trading at over three times its annual revenue [1].

The Impact of Recurring Revenue on Traditional Businesses

The prevailing notion that recurring revenue is solely associated with software companies is a misconception. Regardless of their industry, traditional businesses can harness the power of recurring income streams to enhance their profitability and overall value.

Gamal Codner, the visionary founder of Fresh Heritage, exemplifies this concept beautifully. Fresh Heritage began as a line of men’s grooming products specializing in beard oil for facial hair softening before shaving. Initially, Codner used Facebook ads to attract customers, but the low margin from the average order value of $30 hindered business expansion [2].

Recognizing the need for a strategic shift, Codner introduced additional grooming offerings and launched the VIP Club, a subscription program providing automatic shipments of Fresh Heritage products to its members. The success of this subscription program went beyond mere financial incentives like discounts; it tapped into customers’ desire for a sense of community and belonging. Gamal established local area meetups, fostering networking opportunities among like-minded individuals keen on personal growth, thus nurturing a thriving community and converting customers into loyal subscribers [2].

Consequently, Fresh Heritage’s average order value surged to over $60, and its subscription program grew to 3,000 members, leading to a remarkable EBITDA margin of 40%. The extraordinary performance of Fresh Heritage caught the attention of BRANDED, an aggregator of digitally native, direct-to-consumer brands, which made Gamal an acquisition offer he couldn’t refuse in 2022 [2].

Creating Value through Recurring Revenue

The example of Fresh Heritage illustrates how a recurring revenue model can significantly enhance a company’s value and attract investors. Regardless of the industry, businesses can replicate this success by continuously focusing on what their customers crave.

Recurring revenue models offer several key advantages:

1. Predictability: With regular, predictable cash flow, businesses can stabilize expenses, manage finances more accurately, and invest in growth opportunities with minimal risk. This predictability leads to increased confidence among investors and stakeholders [3].
2. Customer Loyalty: A recurring revenue model fosters more robust relationships with customers. Businesses can enhance customer retention rates by providing valuable, ongoing services or products, ensuring long-term loyalty [3].
3. Increased Valuation: Companies with recurring revenue streams are more appealing to investors, as they offer reliable revenue streams, increased stability, and demonstrate product-market fit. For instance, successful SaaS businesses with recurring revenue for their software platforms have an average six-fold revenue increase for valuation compared to companies that sell perpetual licenses [3].
4. Scalability: Recurring revenue models facilitate business scalability, as predictable cash flow allows for strategic investments in growth initiatives, product development, and customer acquisition [3].

Flexibility: Customers also benefit from recurring revenue models. The ability to subscribe and unsubscribe to services based on changing needs provides them with flexibility and convenience [3].

Embracing the Recurring Revenue Model: A Path to Sustainable Growth

In conclusion, business owners should not underestimate the power of recurring revenue; it is not exclusive to software companies alone. Traditional businesses can unlock tremendous growth potential by adopting a regular revenue model, as seen in the success of Fresh Heritage and other enterprises.

By understanding their customers’ needs and offering ongoing value through subscription services, businesses can secure financial stability, attract investors, and cultivate enduring customer relationships. Ultimately, embracing the recurring revenue model will enable companies to pave the way for sustainable growth, enhanced profitability, and increased value in the market.

References:

1. Darden to Acquire Ruth’s Chris for $715 Million. [LinkedIn]. URL: https://www.fsrmagazine.com/chain-restaurants/darden-acquire-ruths-chris-715-million#:~:text=The%20company%20plans%20to%20acquire,Ruth’s%202022%20transaction%20adjusted%20EBITDA.
2. Recurring Revenue: Not Just for Software Companies Anymore. [Source]. URL: https://www.fsrmagazine.com/chain-restaurants/darden-acquire-ruths-chris-715-million#:~:text=The%20company%20plans%20to%20acquire,Ruth’s%202022%20transaction%20adjusted%20EBITDA.
3. How Important Is Monthly Recurring Revenue For Investors? – Consero Global. [Source]. URL: https://investor.darden.com/news/news-details/2023/Darden-Restaurants-to-Acquire-Ruths-Hospitality-Group-in-715-Million-Transaction/default.aspx
4. Recurring Revenue Model: Good or Bad? – My Tax Hack. [Source]. URL: https://mytaxhack.com/recurring-revenue-model/

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This e-mail is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. Past performance does not guarantee future results.

In today’s ever-changing business landscape, business owners must be prepared for an exit, as the need to sell a business can arise unexpectedly. We will explore the importance of being ready for a business sale, the two most common reasons for selling a business, and how proactive preparation can significantly increase the value of your business.

Always Be Prepared: The Importance of Planning for a Business Exit

As a business owner, you may be passionately focused on growing and running your company, but it’s equally important to have an exit plan in place. A well-thought-out exit strategy can provide financial security, a smooth transition, and the realization of personal goals. Unfortunately, many business owners neglect this crucial aspect until it’s too late.

Did you know that only 20% of businesses proactively put their sale on the market, while the rest are forced to sell due to unforeseen circumstances? How would you feel if you had to sell your business tomorrow? Would you be ready?

By planning early and considering all possibilities, you can safeguard your financial future and ensure your business thrives.

The Unexpected Need to Exit: When Circumstances Change

Life is unpredictable, and as a business owner, you should be prepared for unforeseen events that may necessitate a business sale. Personal health issues, changes in the market, economic downturns, or unexpected opportunities may force you to consider selling your business earlier than planned. By having a comprehensive exit plan in place, you can minimize disruptions and make informed decisions during challenging times.

While there are various reasons business owners decide to sell their businesses, two of the most common are retirement and strategic changes. Let’s delve into these reasons and how they can impact your business sale:

1. Retirement: After years of hard work and dedication, many business owners look forward to a well-deserved retirement. Selling the business becomes a means to unlock the value they’ve built over time, fund their retirement lifestyle, and secure freedom and independence. Proactive wealth management before and after the sale, combined with a persoanlized exit plan are essential to ensure a comfortable retirement and a seamless handover of the business to a new owner.
2. Strategic Changes: Business landscapes are dynamic, and sometimes strategic shifts become necessary for growth and success. Selling a business might be the right move when pursuing new opportunities, diversifying investments, or focusing on other ventures. In such cases, preparedness and proactive planning are vital to maximize the value of the business and secure a successful sale.

Proactive Exit-Planning Impact on Business Value

Having an exit plan in place can significantly increase the value of your business from a buyer’s perspective. An exit plan is a comprehensive strategy that outlines how a business owner will eventually transition out of their business. By implementing a well-thought-out exit plan, business owners can create a more profitable and appealing business for potential buyers.

From the buyer’s perspective, a strong exit plan ensures the business is transferable, with specialized knowledge transferred by the seller. A documented exit plan allows the buyer to take over the company and work on its growth without depending on the seller’s presence. Additionally, the plan focuses on building a competent management team, diversifying the value across the company, and mitigating risks for the buyer.

In conclusion, whether you are considering selling your business soon or planning for a distant exit, it is crucial to be prepared. Unexpected circumstances can arise, and having a well-thought-out exit plan can make all the difference in securing your freedom and ensuring a smooth transition for your business and employees.

Remember, the key to a successful business sale lies in being proactive, well-prepared, and seeking expert advice to maximize the value of your business.

If you are a business owner in need of assistance with planning your ideal financial life before, during, and after the sale of your business, connect with Arlington Wealth Management today to explore how we can help you secure your financial future.

**IMPORTANT DISCLOSURE**

Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.