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Accounting for Life After Business in your Exit Strategy

By Generational Equity

Elderly Couple

In the last few years, research by the Exit Planning Institute (EPI) has indicated an unavoidable fact: many business owners don’t understand how much goes into developing an effective exit strategy. According to the EPI, many owners risk not exiting for an optimal price because they don’t take the necessary steps to prepare for this life-changing moment soon enough.

Christopher Snider, the EPI’s president and CEO, said in an interview earlier this year that:

“Owners are woefully unprepared for this event that – for probably two-thirds of the business owners – is likely to occur within the next 10 to 15 years.”

A survey in February of San Diego business owners (which closely resembled the EPI’s national survey in 2016) emphasized several hurdles that company owners weren’t ready or able to overcome during the exit process, including:

  • 53 percent of business owners paid no attention to their exit strategy, despite most being 51 or older
  • 88 percent had no written plan to transition from the current owner
  • 80 percent have never contacted a professional M&A firm about their exit plans
  • 70 percent didn’t know how much income after-tax they would need to support their lifestyle

Our focus in this piece is on this final statistic. One of the main factors that can be the difference between a textbook exit and missing out on the maximum return on your investment is time. You could have spent years of your life building your business, and therefore would like years after you exit to spend with your family and pursue your favorite pastimes (or even start another business). But, without considering what income you will need as part of your exit strategy, this ambition is placed under serious scrutiny.

Because, without going through every stage of the M&A process with guidance from professionals like our team at Generational Equity (and with the help of a skilled wealth manager), how can you be sure you will have enough money to maintain your lifestyle once you exit? The quick answer is you can’t.

The issue is this: many business owners assume that either the sale of their company will adequately account for their life post-exit, or that they will be able to live on much less than what they’re currently spending. Others feel they have a firm grasp on what their partner and children spend each year, when the true number proves to be far different.

Over the years we have met many business owners that didn’t understand the gulf that can exist between the market value of a company compared to how much they will need to fund the next stage of their lives. By making assumptions or misjudging how much income you require to support your lifestyle, you may place the long-term financial security of you and your family in jeopardy.

Start Your Exit Strategy Early

“If you need $3 million to retire but your company is worth less than this, how will you know that exiting right now is not the best plan? And how will you know that you need to develop strategies to build your value? You won’t.”

The way to bridge this gap is to grow your company using sound exit planning advice and increase net proceeds when you exit. This is easier said than done, but very achievable with the help of skilled guidance. The first step is to meet with your financial advisor and determine how much you will need to earn after you exit – remember to include any compensation and business perks to ensure an accurate number. Many skip this important step, so make sure you’re not one of them.

Now you know what your income needs to be, you should contact Generational Equity. Our team will provide a thorough and detailed business valuation based on your company’s recast financials. This will give you an accurate assessment of what your business is worth in the current market and determine whether it will meet the income you require. If this is below your threshold, you can now introduce strategies to increase the value of your company over time.  We call this our Roadmap for the Enhancing Value which we provide to every client. 

This way, time is on your side, and you can treat your exit strategy as a PROCESS, not an EVENT. Through careful planning and effective practices, you can generate the optimal return for the years you’ve put into the growth of your company, and set yourself up for a comfortable post-exit.

If you are ready to invest time in forming your exit strategy, we encourage you to attend one of our executive conferences. Here, you’ll discover the steps involved in the M&A process and how to develop the ideal exit strategy. Plus, our advisors at Generational Equity will take the time to get to know you and your reasons for exiting, so we can help you enjoy life after your company.

Don’t put off your exit planning – contact our team today to find executive conferences taking place near you.