Business Exit Planning: Part Two

We started a series on what it takes to design and implement a successful “Exit Plan.” We discussed the importance of defining exactly when you want to exit your business—Setting the Target Departure Date. We now continue to explore exit planning with a discussion on step two in the process—Determining the Amount Needed from the Sale of the Business.   

The Three Key Elements to a Successful Exit Plan 

As we discussed last time, most business owners define success as leaving the business: 

  1. On the date they choose (Setting the Target Departure Date)
  2. For the cash they want or need (Determining the Amount Needed from the Sale of the Business)
  3. To the successor they choose (Choosing Your Successor) 

To assist you in designing your exit plan, we work with five important pieces of information: 

  • Your target departure date  
  • A preliminary financial-needs analysis  
  • Your desired successor  
  • A preliminary valuation of your company  
  • A future cash-flow estimate 

Element Two: Determining the Amount Needed from the Sale of the Business 

A comprehensive exit plan requires a preliminary financial-needs analysis prepared by a qualified professional. This analysis will help you set and assess your financial and personal objectives. As we work with our business clients, the goal of much of the analysis and design is to achieve our clients’ financial objectives in a manner consistent with their other personal and professional goals. For most business owners, the financial objective is of primary importance and the most difficult to assess and attain.  

A good financial-needs analysis will help you quantify your financial objectives. Specifically, it will help you determine how much money you must receive—net of income taxes—to reach your short-, medium-, and long-range goals. In addition, this analysis helps your advisor team identify what nonbusiness assets, such as retirement funds, income producing real estate, and other investments, can contribute to your overall financial objectives. 

At a minimum, the financial analysis must include: 

  • Your retirement-income needs based on your current lifestyle expenditures and your projected “wish list” 
  • Inflation assumptions 
  • Value of current investments 
  • Investment growth assumptions on current and future investments 
  • Number of years to retirement 
  • Life expectancies of you and your spouse (if you are married) 

Be aware that this analysis is NOT a comprehensive financial or estate plan. It will NOT make any investment recommendations, it will NOT tell you how to protect it from creditors and lawsuits, and it will NOT tell you how your spouse or children will, could, or should inherit it on your death. It WILL tell you and your advisors how much money you must receive from the sale or transfer of your business to accomplish your goals.  

A typical financial-needs formula used in the analysis is as follows: Total money needed to accomplish the owner’s financial objectives MINUS the owner’s non-business assets EQUALS amount needed from sale of business. 

You want to be sure these numbers are correct. Therefore, you and your advisor team must get on the same page to determine your exit plan.