Exiting on your terms and conditions requires planning with accurate data

An initial and essential step in preparing for your eventual exit from your business successfully is a personal financial GAP Analysis calculating how much money you will need to attain your goals, for the rest of your life post-exit.

Too often business owners rely on a “back of the envelope” or subjective estimate of business value for this calculation, which results in planning that is not helpful and lacks integrity.  And, as the business is often the largest asset in an owner's investment portfolio, it is particularly important.  Meaningful planning requires accurate data.  

For example,  Tom and Jane had $500,000 in retirement and brokerage accounts, personal real estate valued at $1 million, and business real estate valued at $500,000 for a total of $2 million. Tom's Financial Planner Sarah was creating a retirement needs analysis for Tom and his wife and requested Tom provide a value for his business. Tom got back to Sarah with a "rough guess" of $4 million for the business, bringing Tom and Jane's asset total to $6 million.  After performing the needs analysis, Sarah informed Tom and Jane that they "did not have a financial GAP".  Tom and Jane were excited to hear, that based on the value of their business and personal assets, they should be able to realize all of their post-business exit goals!

But wait, what if the "rough guess" on the business valuation Tom provided Sarah was a lot more than the actual value of the business when Tom was "ready to sell and exit"?  What if, when a potential strategic or financial buyer performed their due diligence, Tom and Jane learned that the buyers were only willing to pay $2.5 million due to weak value drivers such as lacking a strong management team, low profitability, and deficient operating systems?  And, the $2.5 million offer was based on a three-year earnout for Tom, meaning he'd need to remain as an employee for that period.  Clearly, this would have a negative impact on Tom and Jane and they would then need to adjust their goals.  Also, in this situation, Tom would not be in control of his exit.

Tom and Jane could have experienced much more control in the years leading up to, and when Tom became "ready to exit" if they had planned with accurate data.  They would have also greatly increased their chances of attaining all of their post exit goals.  

Getting an accurate estimate of value, sooner rather than later, could end up being the difference between attaining or not attaining your post-business goals.  Contact us if you need help in taking action with an  Estimate of Value.

 

 

 

Patrick Ennis

Ennis Consulting & Conciliation, Montgomery Village, MD

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