The phone rings and the voice on the other end says:
“Mr. Smith, we’ve been watching your business for some time now and are impressed with your growth, strategy and position in the marketplace. We’re so impressed that we’d like to know if you’re open to selling. We have the capital and desire to make this a fast, smooth process and offer you a fair price.”
Imagine the flood of questions and emotions swirling around inside you.
If you’re like a lot of entrepreneurs, you’ve been so caught up in running your business that you haven’t exactly prepared for this moment. Certainly not on a random afternoon when you’re fighting fires and dealing with customer issues.
Ask yourself, if this scenario came to life how prepared would you be?
- Do you know what a sale process looks like?
- What’s a fair asking price for your business in the current environment?
- Is that number enough to meet your needs going forward?
- What would your daily life look like if you no longer owned this business?
- How would you manage the money associated with a significant windfall?
If you can’t clearly answer these questions, chances are you need a plan. I’m not just talking about a business plan. You need a comprehensive financial plan that encompasses your personal financial journey, which resides not only outside, but inside your business as well.
STARTING WITH THE END IN MIND
Every financial plan, especially that of a business owner should start with the end in mind. What does this mean?
Put simply, you need to know what your magic number is…the one that will cover your living expenses, healthcare needs, charitable desires and other expected or unexpected life events.
As a business owner, your situation can be more complex than simply arriving at a retirement number that most employees aspire to hit. Unlike someone planning to hit a specific figure at age 65, you may plan to exit your business well before the traditional retirement age.
Your money may need to last longer and you might have to prepare for things like philanthropic efforts or a second go at entrepreneurship.
YOUR WHY AND YOUR WHAT
A good financial planner or wealth manager will tell you that before any conversation begins around how to invest your money, you need to take time to do some serious soul-searching.
You should take quiet time completely removed from your business and with the ones you love and trust.
During this time ask yourself what you want to accomplish in life and why it carries such value to you. How do you want to go about accomplishing those goals?
THE OFFER
Let’s circle back to our friend on the phone for a moment. After a few days, you receive a follow-up call.
Your potential buyer is wondering what your thoughts are about selling, but this time he mentions that, pending formal due diligence, an offer of ~$2.5M seems like a reasonable price for your small but growing business.
IS IT ENOUGH?
You have a good idea of the intended offer and now hopefully you have a vision for your future.
It’s time for a financial plan.
Let’s say that based on your projected living expenses, healthcare needs and travel desires that you need roughly $3.5M in savings at the time of sale. Let’s also assume that you wish to preserve another $1M to leave as a legacy to your favorite charity and your children.
Based on the information in hand today, you would need $4.5M to live the life you envisioned.
The problem: Since so much of your personal wealth is tied up in your business, you only have about $300k in savings and retirement funds right now.
If you take the offer for $2.5M, you’re still short of your goal by $1.7M, and that doesn’t even consider that amount you’ll owe to the IRS upon sale!
Without a financial plan in place, you wouldn’t know what your needs really were. You may have been tempted to accept what seems like an impressive payout, only to end up having to return to work or find another source of income in a few years.
THE PATH FORWARD
While an unsolicited offer for your business may or may not ever happen, at some point you will need to make a decision around exiting your business.
Hopefully this example demonstrates why it’s so critical that you have a comprehensive personal financial plan in place.
As a business owner, you should have a relationship with a trusted financial advisor. I suggest one that has experience and a willingness to help grow your total net worth, not just your investments.
Many traditional advisors are ultimately portfolio managers. They’re most interested in helping you grow your investable assets. Far fewer have experience in deriving an accurate estimated value of your business and can help you develop a plan to grow that value such that it meets or exceeds the what your personal financial plan requires.