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Business Owners

The Importance of a Goals-Based Exit Plan for Your Business

By October 25, 2018No Comments

EXECUTIVE SUMMARY

If you are one of the 40% of business owners who plan to sell their company in the next 5 years 1, what is your plan? If you are in the “wait and see” camp, then you are setting yourself up for disappointment and frustration. Instead, begin planning today so you can enjoy positive outcomes down the road. Don’t be one of the 83% of business owners who have no transition plan, or have not communicated or written it down. 2

You might wonder, where do I start? What if you started with the personal goals you are looking to accomplish in your life, and then planning for the exit of your business in the context of “what’s next?”

In this series, I want to discuss goals-based exit planning and today we’ll start by talking about why it’s important.

Emotional Importance of Planning

Your business is your baby. You beat the odds of failure through hard work, grit, determination, persistence and perhaps a little luck. You’ve defined your life by your business and the work you do. It makes sense then, that it takes time to mentally and emotionally detach and think about the next chapter in your life. Let’s start by asking a few questions.

Do I want to stay involved?

For some, the prospect of leaving a business completely may be difficult. In the case of a sale to the next generation or to employees, they may need you to stay involved for a period of time to ensure a smooth transition. If you’re selling to a 3rd party strategic buyer, you may have the opportunity to leave with no additional time commitment. Most business owners find it difficult to go from calling the shots to suddenly being an employee.

All businesses involve a level of stress, but we know there is good stress, the kind that motivates, energizes and encourages us, and bad stress, the kind that lowers our energy and creates fear and anxiety. Depending on the dynamics of the buyer and your desire to stay involved, you can avoid accepting a deal that doesn’t align with your personal goals.

How will my family be impacted?

What is the current interaction between you, your family and the business? Is family involved? Will family be taking over? It’s importance to start thinking and talking ahead of time about the change an exit of the business will have on your family dynamics. It’s important to understand these dynamics so you do not regret making certain decisions down the road. Plus, it’s easier to have discussions about an event in the future versus something that will impact family immediately.

How do I feel about my lifestyle being tied to uncertainty of the market?

How do you feel about the idea of your income being generated from your investment portfolio versus a draw from business profits? At Endowment Wealth Management, we utilize the Endowment Investment PhilosophyTM, which includes allocations to private equity, real assets, hedge strategies and illiquid investments that can help cushion portfolio volatility. But with a large portion of the net worth for most business owners being from the business, this is still a change. It’s important to learn what your risk profile and needs are ahead of time, so you know what to expect from your portfolio and it’s volatility.

What do I want to accomplish next?

The most important question involves the next challenge or opportunity in your life. What is important to you?

Is it family?

Travel?

Charitable causes?

Do you want to your time post-sale sailing the world or starting a new business?

There is no “right” answer, just YOUR answer. It all comes back to what gives you purpose and direction. What energizes you and “gives you life.” Once we’ve identified your values and what the next chapter looks like, we can turn to the financial side of planning.

In the end, is your goal to accomplish and experience all of life’s possibilities or is it to sell for maximum profit?

Financial Importance of Planning

How much is my business worth?

This question is usually where you see articles and “experts” start the conversation but in reality this should come second. In the end, is your goal to accomplish and experience all of life’s possibilities or is it to sell for maximum profit? Not that the two are exclusive, but it’s important to remember WHY you are selling. In fact, the most successful outcome might not always align with a maximize profit paradigm.

That being said, when is the last time you had your business valued, if ever? If you have recently, what is your level of confidence that you will:

  1. Sell for that price?
  2. Sell in the time frame you desire?
  3. Take-home enough cash to cover your wish list?

Do you know how much money you need to fund your future goals? Or are you fixated on a number to net from the sale, when in reality the amount you need may be much different? If the number is higher you can work with an eye towards increasing the business value. If the number is lower, perhaps you can start entertaining offers today.

I can assist you in conducting a preliminary business valuation or work with outside valuation experts to gain an understanding of “best case” and “worst case” scenarios. This is important to do TODAY so that you have the information you need to be empowered and have the ability to sell when you don’t need to versus when you have to.

What’s on my wish list?

I discussed earlier that the most important question involves what you want to accomplish next. What are some specific items on your wish list? Grab a bottle of wine and sit down with your spouse (if you’re married) to discuss what you’d like to do when you have the time available to do what you choose. Be creative and expand your thinking. You might like to golf but you won’t enjoy 50+ hours of it a week. Remember when you were a kid and was asked to put together a Christmas list? Explore the possibilities of life.

What are the cost of my goals?

Next, begin to put numbers to those wishes. This is the adult side of the Christmas list. How much will the things you want to do cost? Be completely dispassionate about whether or not you’ll actually be able to do them, just mark down the cost.

How important are my goals?

Now that you’ve made your wish list and assigned some costs to these goals, begin to sort them based on three categories. 

  • Lifestyle Essentials – These are the goals where you want a low risk of shortfall and high probability of success. Food, clothing and shelter are items in this category. 
  • Lifestyle Enhancers – The items on this list are things you would love to do but could also do without. For example, donating $50,000/yr. and enjoying the charity dinners or taking your family on an expensive vacation every year would be great, but if you went to a few less or had to cut back you would be okay with that as well. These goals are assigned a lower level of confidence.
  • Endowments – These include legacies to charity or family. They typically occur at or near the end of life only after your other goals have been accomplished. These goals do not require a high degree

Based on these questions, which deal structure is right for me?

When you’ve asked the important questions, determined your goals and how your business value relates to the cost of your goals, you can begin to entertain which deal structure may be most appropriate. This is also the time to consider the taxation of any potential business sale and how you can prepare today to minimize taxes in the future. We’ll talk about deal structures and minimizing taxes in future posts.

Do you know how much money you need to fund your future goals? Or are you fixated on a number to net from the sale?

Benefits of a Goals-Based Approach

In his best-selling book “The 7 Habits of Highly Effective People”, Stephen Covey said, “Begin with the end in mind.” This is the approach of goals-based exit planning. With the goals-based method you gain:

  • Certainty – By knowing exactly how much you need to net from the sale based on the cost of your goals you gain certainty. Sometimes offers with enough assets to cover your goals might be the best offer, even if it’s not the “most profitable” offer.
  • Contingencies – You can consider the upside and downside of each offer, setting them on a level playing field. As an owner, you can then focus on the risks of your business being successful. You know what a successful transaction will look like based on your goals and are able to plan ahead for all contingencies.
  • Valuation – When you know what you need and you know your current valuation you can calculate and know any differential between you and a prospective buyer’s offer. This will assist you in your negotiations.

By completing a goals-focused plan, you gain control of the process. When we’ve determined what you need you can evaluate competing offers, structure a sale to meet your needs and create a strategy for post-sale investments.

Begin Your Goals-Based Discussion

You’ve created a successful enterprise and that deserves applause. It’s not easy! When it comes time to move on to the next chapter in your life it pays to “begin with the end in mind” and use your goals for the future to guide you in your exit planning. As your trusted fiduciary advisor, I can walk you through the process of identifying your future goals, how much they cost and what you need to net from your sale to have a high degree of certainty of accomplishing those goals. 

The confidence and empowerment you will gain from a goals-focused plan will help you to enjoy life’s possibilities.

Have Questions? Need an expert opinion?

If you have more questions I’m happy to help you. I make getting answers easy, without having to talk to some high-pressure sales person. Just use the secure contact form to ask a question, or email me directly at John@EndowmentWM.com, and I’ll get back to you via email within 48 hours to help point you in the right direction. I also offer a free wealth discovery meeting where we can discuss your personal situation and make sure you’re on the right path. Remember, it’s free to contact me and we are fiduciary advisors putting your personal needs first and foremost.

Be Great,

John Weninger, CFP®
Wealth Advisor
Endowment Wealth Management, Inc.

1 “Who’s the boss?” UBS, 1Q 2018

2 Exit Planning Institute, State of Owner Readiness Survey, 2013

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John Weninger, CFP®

John is a Wealth Advisor within the Family Wealth Management area of the Company. He is the first point of contact for our prospective clients, conducting introductory meetings with clients to discuss their family dynamic and wealth management needs. John assumes the role of the client family’s Chief Financial Officer and coordinates with the client’s current professionals (i.e. attorney, tax accountant, stockbroker, insurance agent) to provide an integrated wealth management plan and investment solution that is custom tailored to meet each client’s specific needs. John began his career at Merrill Lynch as an advisor assistant, serving the needs of families & small business owners. He was the founder of Vision Wealth Partners, a Wisconsin registered investment advisor and has been helping families and small-business owners with financial planning and investment management since 2011. His writing has been featured on CNBC, Yahoo! Finance, U.S. News and MyCompanyRetirementPlan.com. John received his Bachelor’s Degree from St. Norbert College majoring in Finance. He earned his Certified Financial Planner (CFP®) in 2017.