By Bruce Juhola / Rimrock Partners
"When a man does not know which harbor he is heading for, no wind is the right wind."
So said Seneca almost 2,000 years ago. Seneca was, indeed, a wise philosopher. Today he would probably become a management consultant and make millions of dollars. His advice is as sound for business owners now as it was centuries ago. Yet, few owners heed that advice or appreciate its implicit warning.
Failing to set goals means that an owner will not be able to exit his/her business in style. Many owners do not set exit objectives precisely because it is emotionally too wrenching to separate themselves from a business they have created, nurtured, lived with, suffered with, brought to maturity and in which they have totally immersed themselves. It is difficult, if not impossible, for any planning professional to engage an owner in the planning process until that owner is emotionally prepared to leave the business. Those who are emotionally ready to face their departure, often do not know what to do or where to begin.
This is the point at which the need for clear, simple exit objectives is of paramount importance. There are three straightforward retirement goals that every owner must fix in his mind. Establishing these goals allows the owner to cut through a lot of muddled thinking that previously prevented him/her from moving forward.
These objectives are:
1. How much longer do I want to work in the business before retiring or moving on?
2. What is the annual after-tax income I want during retirement (in today's dollars)?
3. Who do I want to transfer the business to:
- Family?
- Key employee(s)?
- Co-owner?
- Outside party?
No owner can effectively leave his/her business without establishing each of these objectives. Many owners will set other objectives as well, such as:
- Providing for one or more employees
- Transferring wealth to family members
- Getting maximum value for the business
- Giving to charity
- Taking the business to the next level - with someone else's money
Unfortunately, only a handful of owners carefully formulate these objectives before they choose an exit path.
Remember, your objectives control all planning efforts and strategies. You are the person primarily responsible for this step, but you need not work alone.
Who can help?
Ask your insurance or financial advisor if he or she has the computer capability to create a financial retirement model for you based on at least the following factors:
- Your retirement income needs based on current lifestyle expenditures. (You must develop a personal budget!);
- Inflation assumptions;
- Size of current investments;
- Investment growth assumptions, on current and future investments;
- Number of years to retirement; and
- Life expectancies (yours and that of your spouse)
As you work through this model you will likely discover that your current investments are not sufficient to allow you to retire with financial security. You will need more money and additional investments before you can leave your business in style. While you can personally accumulate additional cash before you retire, the bulk of the needed investment monies will come from the sale of your business.
It is important to work with an advisor who can run a number of "what if" scenarios using different variables. With your advisor's input you can formulate realistic financial objectives. Empathetic and experienced advisors can be of immense assistance at this initial stage.
Your advisors should develop a retirement income needs model based upon your current lifestyle. You will then be able to calculate how much money you want or need when you leave the business. This, in turn, tells you how much cash you need to get from the business - either over time (if you sell to children, employees or partners) or how much you need in cash (if you sell the business to an outside party). Only by going through this analysis can you empirically determine how much money you need to reap from the sale of your business.
Future columns will discuss other common ownership objectives as well as how to resolve conflicts between objectives. We"ll take a look at valuation, how to make the business more valuable, and how to transfer the business to insiders or sell to a third party for maximum value.
This column appears regularly in Cascade Business News.
To reach Bruce Juhola, please contact us.
