The Business Owners’ Special Series (B.O.S.S.) No. 37
As an exit planning advisor, I ask business owners why they own a business. The intent is not to understand why the owner had decided to start a business. That’s ancient history. The question seeks to understand, specifically, what you intend the business to provide for you in the future.
You can meander along, happily, with profitable business and not pursue the forward-thinking aspects of this question. However, if you cannot articulate what you expect it to provide for you in the future, you will not know when you should exit your business. You will not develop an effective exit strategy. Furthermore, your business will likely be undervalued when you do exit. Your wealth may fall short of supporting your post-exit aspirations. According to a recent whitepaper published by the Exit Planning Institute, a startling seventy-five percent of former business owners expressed regret after they exited their business. You can avoid being among that sad statistic; however, it will not be by happenstance:
Every business owner should have an exit strategy for acquiring the financial resources required to meet their retirement goals and objectives.
Are you asking the right question?
Have you asked yourself when you should exit your business and retire? Does your response sound like the following? “I will exit my business when I reach age 60.” Business owners often envision that their business exit will occur when they reach a specific age or stage in life. We believe that the question, “When will you retire and exit your business?” is not the right one to ask.
Instead, ask yourself, “What do I want my business to provide me with for my future financial needs and goals?” Once you have thoughtfully answered this question, “when and how you should exit” will become more apparent. Furthermore, you will have critical information required for developing a bona fide business exit strategy.
Here is a common refrain that we hear when we ask business owners why they own a business:
- The business provides the cash flow I need to pay my bills and supports my lifestyle. I am very comfortable right now.
That is terrific. Your business should do that for you – but it should do so much more! Would you like your business to fund any of the following?
- Pay off any mortgage in full.
- Eliminate all your debts.
- Buy a second or third home.
- Help your children buy their first home.
- Fund your grandchildren’s college education costs.
- Contribute start-up capital for your children to start their own businesses.
- Travel more when you retire.
- Pursue hobbies during retirement.
- Assist aging parents one day with financial support.
- Provide high-quality long-term care for yourself, your spouse or your parents, should it be necessary.
- Leave a certain amount of wealth to your children or grandchildren when you are gone.
- Bestow a significant bequest to a favorite charity.
- Support your lifestyle for the duration of your life.
- If you retire and exit your business at age 60,
- And you live to be 95 or 100 in age,
- Do you know how much wealth is required for you to live comfortably for the following four decades?
Add your own personal aspirations to the list above and think about what they will cost either now or a few years from now. Then, ask yourself why you own a business and consider this:
I own a business because I want my business to provide me with the financial resources for everything I want now, and in retirement for the rest of my life.
If you believe this is the reason you own a business, then ask yourself these questions:
- How much wealth will you need to fund everything you want for yourself and your loved ones?
- Are you counting on the sale of your business to fund the items on your want-list?
- What assets, other than your business, do you have to fund all items on your want-list?
If you are counting on the sale of your business to be the major source of wealth in retirement, then you need a business exit strategy. To begin with, you need to know:
- How much do I need to sell my business for in order to fund my lifestyle choices and want-list?
- What is the current value of the business?
The difference between what you will need from the sale of your business and what it is worth today is your “wealth gap.” An exit strategy will, among other things, identify the following:
- The wealth gap.
- Opportunities to improve business value and close the wealth gap.
- The type of buyer that will most likely meet your financial objectives (because different types of buyers will pay different prices).
Why you need an exit strategy
An exit strategy will provide a better answer to the question, “When will you retire?” because the typical response, “I will retire when I am age sixty,” will now be replaced with something like this:
- “My business is worth $12 million.
- I need to sell my business for $20 million to support my post-exit lifestyle, retirement aspirations and want-list.
- I have an action plan as to how I will increase my business value.
- When my business’s value is $20 million, that is when I will retire and exit my business and retire.”
With an exit strategy in hand, you may achieve your business exit value of $20 million long before you turn sixty. However, you will know with confidence that you have reached your desired exit goal, regardless of your age at that time.
Start with a firm understanding of why you own a business and what you want that business to provide for you. Then, develop an exit strategy so that you will arrive at your desired financial destination. That is why you own a business.