Exit strategy means more than just cashing in.
The biggest payday for most successful CEOs
and entrepreneurs is the day they sell their businesses and retire.
But millions of dollars may be left on the table if the business
owner doesn't have his or her house in order.
Worse than not getting the full value for
their companies, they may end up with a gap in their wealth management
plans that cannot be filled later.
The good news is that with some effort, and
by delegating tasks to good advisers, entrepreneurs and CEOs can,
in a relatively short period of time, dodge the potential pitfalls
and be on track to get maximum benefit from the exit transaction.
Over the years, our firm has worked with many owners
on the sales of their private companies. Although no two situations
are the same, we have concluded that there are two common gaps
in exit strategies and outcomes that center around the exit planning
process itself.
Revenue planning mistake
First, there seems to be a big disconnect
for founders and owners between what current business revenues
mean to them and what they will need as a critical mass sum of
money to retire and achieve all that is important to them with
a high degree of probability.
All CEOs understand that $18 million compared to
$15 million in sales means an incremental increase in the amount
of income they will receive. But, a big disconnect comes when
they want to retire at a certain income level.
One client, whom we'll call Bill Edwards, had projected
his net sales proceeds after taxes at $13.4 million. He assumed
a growth rate of 8 percent and an inflation rate of 3 percent
to determine if he and his wife could meet their retirement income
goals and needs as well as hang onto $3.8 million in assets they
wished to leave as an inheritance to their children.
A financial dreams flaw
Being a sharp businessman, Edwards did what
many financial planners usually do, and he figured he was home
free. The truth, though, is that even if the couple had made 8
percent over their lifetime, it is unlikely the markets would
have gone up at a rate of 8 percent every year. This is a flaw
in the majority of financial plans and could have ruined the couple's
plan and their financial dreams.
We stress-tested the Edwards' wealth management
plan, using nearly a century of historical data, including bull
markets and valleys, such as the Great Depression and the 2000-2002
stock market downturn. We discovered that the Edwards' plan would
have succeeded 820 out of 1,000 times, which meant the Edwards
had roughly an 82 percent chance of achieving all of their goals.
Only after the analysis did the Edwards feel comfortable
with the probability of success of their plan. They also understood
their plan would have to be monitored and adjusted to ensure that
it stayed on track.
The second gap that CEOs and entrepreneurs need
to address is putting their houses in order.
More than a CPA
This means that the business owner must understand
what buyers are looking for, what the strengths and weaknesses
of their businesses are and what steps they must take to put their
houses in order for a smooth and profitable sale. To do this,
they need the right team of professionals, including a specialized
CPA, a transaction attorney, a financial adviser, an M&A firm
and an estate-planning attorney.
Early on, a good M&A firm puts in place new business
financials using a CPA firm that understands the exit transaction.
Buyers want clear, concise historical financials. Usually the
company's existing CPA isn't the appropriate one to get this done.
Other big players on the team - who can make or
cost the sellers millions - are the transaction and estate planning
attorneys. Here again, the company's established attorney is unlikely
to be the one who understands how best to consummate a deal.
Increasing the odds
An estate planning attorney can also help
in the process by reducing, if not totally eliminating, taxes
due from the sale as well as by protecting the estate for the
benefit of the loved ones, through such measures as setting up
a charitable trust.
The costs of the professionals are minor compared
to gains or tax savings made by the client.
Fully understanding the financial issues involved
in exiting a business and assembling the right team will increase
the odds of success and increase the odds of a prosperous retirement.
Authors Haitham "Hutch" Ashoo and Christopher
Snyder are partners at Pillar Financial Services Inc. in Walnut
Creek. Ashoo is founder, president and CEO. Reach them at PFS@PillarOnline.com
or 925-356-6780.
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