In the early phases of starting and growing a business, how and when you exit is unlikely to be top of mind. Matters like how to increase revenue or make payroll tend to take priority. However, as your business begins to grow and scale, it is time to start thinking about the future.
Whether we like to think about it or not, all entrepreneurs will eventually transition from their businesses. If you put in the effort to begin planning for the inevitable, you can be part of the group that exits on your own terms.
It all starts with a few relatively simple steps and a commitment to continuous re-evaluation.
STEP 1: A PERSONAL PLAN FOR LIFE BEYOND BUSINESS
Owning and leading a business takes so much time and energy that owners often forget about one of their business’ most important assets: themselves. While your business may consume much of your waking hours today, life will change dramatically once you have transitioned or sold your company. Anticipating this change and envisioning life beyond business is an important first step.
Begin by assembling a personal advisory team. Your team should only include those you can completely trust. Often your personal board consists of a spouse, a mentor or perhaps a trusted advisor. Whomever you choose, they should be individuals with whom you can have deeply personal discussions.
Schedule regular meetings on your calendar just like you would board meetings for your business, and assemble your team to discuss topics such as:
- What’s your post-business vision for yourself?
- How does your family fit into your vision?
- Do you feel as though you have a purpose that extends beyond that of a business owner?
- Are there charitable goals that you wish to meet?
- Do you have goals around your health and wellness?
- What would you classify as a need vs a want in your life?
Ensure you are documenting these discussions and tracking action items just as you would in the course of a regular board meeting. In addition to consulting with an advisory board, take time at least once or twice a year for a personal retreat. Completely unplug from your business and dedicate this time for self-reflection. Making this intentional effort will allow you to envision and plan for the next phase of life before it sneaks up on you.
STEP 2: A COMPREHENSIVE FINANCIAL PLAN
Studies have shown that 80-90% of the average business owner’s net worth is tied up in their business.
Since financial advisors traditionally manage investment portfolios and not businesses, it makes entrepreneurs less attractive clients for them. It can also result in the entrepreneur overlooking the need for a financial plan. This is an unfortunate consequence and a tremendous gap in today’s financial services model. Business owners have unique needs that make it even more important that they have a continuously updated financial plan. Here’s why.
If you have not planned for your current and future financial needs, how can you appropriately time a transition from your business?
In the absence of a well-prepared financial plan, a business owner may be prone to exit too early or accept an offer for their company that seems attractive but with net proceeds that fall far short of funding financial goals for the rest of their life. This happens too often and is a major reason why many former owners find themselves in the undesirable position of an unexpected reduction in lifestyle or even a return to work shortly after what they thought was a windfall sale.
Even if you have relatively little in terms of personal savings, you should not put off developing a relationship with an advisor. Find an experienced private wealth manager who specializes in working with business owners and can help you grow the value of your business as well as your investment portfolio.
STEP 3: A BUSINESS VALUATION
The final step to begin the path to a well-planned exit on your terms is to determine what your business is worth today and map out the potential for an increase in value.
It is not uncommon for a business owner to over-estimate the value of their business. Enlisting the help of a professional will serve to provide an unbiased view. Armed with a business valuation and a personal financial plan, you can begin to evaluate and address your wealth gap and chart your exit plan.
THE WEALTH GAP
The wealth gap is simply the difference between the savings you need to meet your financial plan goals compared to the current estimated value of your non-business assets.
For example, assume your financial plan reveals that if you were to exit your business at age 55, you would need $18 million to meet your financial goals.
Now, assume that you currently have non-business assets of $4 million. Your wealth gap is $14 million! If your business valuation indicates your company is worth $8 million, a significant sum of money for many people, it would sill leave you with a shortfall of $6 million before factoring in taxes associated with a transfer or sale.
Closing such a gap might seem daunting, but because you have proactively begun your exit plan you have the information and time to make the adjustments necessary to meet ALL of your goals.