Presented by T. Ray Phillips
“I never worry about action, but only about inaction. ” Winston Churchill
“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now. ”
If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they assume they cannot plan their exits.
If you aren’t sure about what you want, or when you want to leave, why is it so important to decide to act today?
First, recognize that when you take a passive attitude toward the irrefutable fact that you will—one way or another—leave your business, you are settling for less than the most profitable exit for yourself and for your family.
Second, understand that preparing and transferring a company for top dollar takes time—on average five-ten years. Most of those years will be spent preparing your business for the transfer and, if you decide to sell to employees or children (two groups who rarely have any money), giving them time to earn the money to pay you for your interest.
The more time you have to design and implement income tax-saving strategies, build value, strengthen your management team, and begin a gradual transfer of ownership (not control) to key employees or children, the more likely you are to reach your goals.
Third, if you decide to sell to a third party, remember that the market does not operate on your schedule and may not be paying peak prices when you are ready to sell.
If the prospect of leaving your company with little to show for it is unacceptable to you, let’s look at your three options.
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Quantify Your Resources: The Ultimate Exit Test
Tuesday, December 13th, 2011Presented by T. Ray Phillips
In the first Step of The Seven Step Exit Planning Process™, you, as an owner, establish three primary exit objectives:
The date you wish to exit;
The amount of cash you want upon exit;
and Your choice of successor.
Today, let’s look carefully at that second objective: How much cash will you need from the sale of the company to enjoy a financially secure post-business life? For most owners this is a great starting point for determining when, or if, they can leave their businesses.
Peter Daniels was the 58-year old (fictional) owner of Daniels Food Processing, Inc. He had engaged his financial advisor to:
Set a realistic assumption for a rate of return on Peter’s investments;
Research actuarial information to determine average life expectancies for both he and his wife;
and Help him and his wife agree on and establish an acceptable post-exit annual income amount.
As part of this process, Peter and his advisor reached the critical question whose answer would determine Peter’s ability to retire on his terms: What must the value of Peter’s business be if Peter is to leave, as he desires, at age 63?
Like Peter, your resources are likely both in the business and outside of it. You need to know the value of both so you can determine if there is a gap between the amount of money you will need in the future and the amount you have today. This gap must be quantified and—to exit successfully—you must create and implement a plan to close that gap. Most owners retain an experienced financial planner to help with this project.
Peter and his advisor used the following process:
First: Peter and his wife (Pam) agreed on their future annual income needs. They believed that they could live on $200,000 per year (95% of their current income) and would require that level of income for approximately 30 years (based on their life expectancies).
Second: Peter and his advisor, using their agreed-upon estimate of a projected rate of return, calculated that Peter’s non-business investments assets would be worth approximately $500,000 in five years (Peter’s desired exit date).
Third: Peter’s advisor calculated that the amount of investment capital needed to pay Peter and his wife $200,000 per year for the duration of their lives (based upon current actuarial tables and assuming a seven percent investment return*) beginning five years hence is approximately $3,000,000. Thus the net (after tax) sale proceeds from the sale of the business must be $2,500,000, or between $3,000,000 and $3,500,000 pre-tax.
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Tags: exit strategies, indianapolis small business, Small business exit planning
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