In my experience as a longtime M&A Advisor, most business owners do not properly take into consideration the amount of money they will need to live on, post transaction and after taxes are paid. In anticipating an exit, owners are often so caught up with the valuation of their business, looking forward to how much money they will get from the sale that they are poorly prepared for what it will actually take for them to maintain their lifestyle going forward. Some of the most common items they don’t factor into their future needs are business perks, such as: insurance, medical, cell phones, entertainment & meals, gas, professional association costs.
This is where Exit Planning becomes extremely important as it allows business owners to gain a better understanding of their financial goals to make sure they can meet future financial and legacy goals after the sale of their business. When I am invited to work with a small business owner who is considering selling their business, one of the first questions I ask is how they plan to achieve their personal objectives after their business is sold: Do they have adequate savings? What is their overall financial condition? Are they genuinely ready for the life they want to live after the sale? And what is the time line of their anticipated transaction?
In reviewing this process, there are two main obstacles that small business owners commonly run into:
1. They are very focused on their business objectives but have rarely taken the time to identify their personal objectives. They often think (or hope) that they will be “okay” once their business sells, but they haven’t actually thought this through, fully.
2. Their personal objectives may conflict with their business objectives.
A good example of this would be my client, the home healthcare agency, whose owner did everything he could to minimize profits in the business by running a tremendous amount of personal items through the business as expenses. When they were ready to sell, the buyers were unable to get bank financing because many of those items were not legitimate business expenses.
The owner was then faced with two options: reduce the sale price to reflect the true value of the business, or carryback a larger seller’s note. This is a prime example of what happens when owners don’t consider these factors that can contribute to a loss of value when they go to market to sell their business.
So, what’s the most important figure that every business owner must know? It is how much money they will need to support their lifestyle, long-term. My clients are small business owners with $5 to $25 MM in sales. My task is to help them determine through the Exit Planning process whether the sale of their business in the current market will help them achieve their personal and financial objectives. Once they have done that planning, they are not only better informed but are actually more “at peace” with the process because they know that they have done everything they needed to do to ensure the lifestyle they want, post transaction. This planning will then help them maintain their lifestyle and give them the confidence to move on to the next venture or the next phase of their life. For more information, contact Ric Hepburn at: firstname.lastname@example.org for a confidential conversation.