Exit Planning: The
Side of the Equation
[fname], in this email I want to give you an overview of what every business
owner needs to consider – from a personal
perspective – when planning a future exit from your business. This
information should be used as a guide to assist you in preparing your
personal life and finances by aligning your liquid and illiquid assets
towards achieving your goals for your exit.
Setting and Measuring Personal Goals
The first step in any planning process is setting goals. Just like you
choose a destination prior to setting on a voyage, so too must you define
your goals and what you want to achieve with your exit. Think back to when
you started your business. Aside from the ability to control your own
destiny, what were the dreams and aspirations that you valued when your
future success would arrive? How did you envision living once you had the
financial freedom to choose how you spend your days?
You see, not only are the most successful exits planned in the owner's mind
well in advance of any transfer of ownership, this type of forward thinking
is essential to reaching your envisioned milestone. Amidst a recession and
the ongoing challenges of running your business, deep down there is a life
that you were envisioning living once the dust settled and your business
venture were complete.
How would you spend your time if you're
not working in your business?
Often the threshold question when contemplating your future life is 'how
would you spend your time without working in your business?'. This is the
question upon which all things rest because without this type of focus, it
is unlikely that you will escape the ever-present demands of your private
As a tool to assist you in developing these goals, it is helpful to
construct a calendar of events that you would participate in once your
business exit is complete. Take detailed notes, filling in the days on a
future calendar and how you would fill them. You should visualize this
occurring and act as if it already exits.
One helpful tool to assist in this exercise is to detail each of the
expenses that are a part of your future lifestyle (without your business).
When you engage your mind in this direction, you begin to form thought of
your exit and let them guide your decisions within your business. This can
be tough to do for owners who simply live and pay for their lifestyle out of
their business. Remember that this is a critically important step, not to be
overlooked due to its seeming simplicity.
Increase your personal savings
Most owners of private businesses have very little money saved outside of
the business. This is largely because you have successfully bet on yourself
throughout your career, not trusting the volatility of liquid investments.
But remember that personal diversification can only be achieved by
increasing your liquidity. You cannot pay your bills with real estate equity
or shares of your private business. So even if it means being taxed on those
dollars, you ultimately have more options for your exit if you are
personally prepared from a financial perspective.
Close your 'Value Gap'
The value gap is the amount of money that you need to extract from your
business, net of fees and taxes. Once you can measure this amount, you can
look to achieve your equity extractions through a series of exit options
scenarios to figure out which one best meets your goals.
Checking your insurance plans
Too often, insurance is purchased for a variety of reasons – for issues that
exist as well as potential contingencies that need to be managed through the
use of insurance. It is likely that time has removed many of these risks but
you are continuing to hold onto those policies. Remove excess policies where
risks no longer need to be insured. After this exercise, be certain to
bolster areas that do require continued insurance.
Updating your buy-sell agreements
If you have partners in your business, you have likely had exposure to a
buy-sell arrangement. Since that buy-sell was put in place and funded with
insurance, many changes have likely taken place. It is not uncommon to see
'legacy' policies that need updating.
Insure against estate taxes
Note that if your total net worth exceeds $7 million (for a married couple),
you should look into your current estate tax exposure. This simply means
that Congress is set to review and update the estate tax laws this Fall. It
is common for owners to let 10 or more years pass without updating their
estate planning documents. Conduct a review of these vital documents to
protect against onerous taxes. It is a shame to work a lifetime only to have
the wealth go to the government.
Charitable, Family, and Philanthropic
Give due consideration to where you want your wealth to end up. You have
likely amassed a large amount of wealth that can go to family, friend,
charities, and/or foundations. One of the rewards of beginning a gifting
program while you are alive is the benefits of enjoying the distributions of
your wealth. One of the advantages of such a strategy is to utilize the
gifting laws to transfer more of your wealth.
Although our recessionary times continue, you should note that a great
opportunity to transfer more of your wealth exists today. Lower business
values, low interest rates, and the continuation of certain gifting vehicles
(such as Grantor Retained Annuity Trusts – GRATs) are still in place to aid
you with your gifting programs.
Remember that your personal affairs, starting with your goals and ending
with a review of your financial and gifting strategies, is the optimal way
to begin pursuing your personal readiness for a future exit.
As always if you need some advice, you're
welcome to email me of call me here at the office at 281-993-4530.
Charles Wilson, CPA/CFF, CGMA, CBEC
Charles Wilson, LLC
307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
Charles Wilson, CPA/CFF,
CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with
Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions
company. Parts of the content in this email are taken from previous
Pinnacle Equity Solutions, Inc's. newsletter library and website in
accordance with Charles Wilson's certification in Pinnacle's Certification
and Membership Program. All Copyrights are the properties of Pinnacle Equity
Solutions, Inc. and Charles Wilson, LLC and their respective owners.