Michael F. Coyle, CBI
Exit Planning Advisor
I read an article the other day indicating that only 9% of all current retirees had more than $500,000 in investments to support their retirement needs and only 34% had more than $100,000. This is pretty grim given that a woman 65 today has a life expectancy of 84 and a man 79. Also, rising tax rates, energy costs and medical bills can consume the majority of a retirees income. Who knows what will happen to Social Security it but it seems that many people are counting it to be their primary source of retirement income.
I have worked with hundreds of small business owners in assisting them in preparing for and executing an exit from their business. It is common to see that their business value can represent up to 75-80% of their entire net worth. These business owners failed to diversify their wealth during their years of business ownership. Many reinvested in their businesses or fueled their lifestyles with the cash flow from their businesses.
I have also experienced that very few business owners have a true understanding of the value of their business, or what drives and detracts from its value. This is perplexing given that their business value is often the largest element of their net worth and this business value is very fragile, illiquid, and subject to wide swings during times of economic change.
My advice to small business owners include:
- Think of your business as a wealth generating engine and not just a professional activity. Understand what creates value in your business and know how to preserve and grow its value
- Understand that value is in the eye of the beholder and what you “think” your business is worth and what a typical buyer thinks it is worth can be very different
- Have a qualified 3rd party formally value your business at least every 2-3 years and have a plan to grow it value
- Eliminate the waste in your business and use this cash to diversify your wealth. You can do this by buying real estate (maybe your business real estate), creating an aggressive qualified retirement program, and/or personally investing income from excess cash flow
- Develop an exit strategy for your business and keep your eye on this prize. When you sell or transfer your business this is usually the biggest payday you will ever experience. You should have an exit strategy when you start the business and you should make this into a formal exit plan within 5-7 years of your planned exit
- You can never start too early in preparing for your exit and in maximizing your after tax cash from your exit
- Develop a personal plan for after you exit your business. This includes both an investment plan and also a life plan that will make you (and those around you) happy and productive in retirement
- Use professional advisors to assist you in understanding, maximizing, and realizing the full value of your business. The modest fees you will pay should give you a many-fold return upon exiting your business