7 Steps to Post-Exit Financial Security

Nick Pharo

Nick Pharo, CPA, VonLehman CPA & Advisory Firm
February 2017

If you were forced to exit your business tomorrow, do you know how much money you would need? Some owners seem to have a handle on what they want, but fewer know how much they need. Both are important to understand. The post-exit lifestyle you want is critical in determining what value you will need from your business. As an exit planning advisor, my task is to identify any potential asset gap between owners’ needs and available assets, and then develop a strategy on how to close that gap. In this article, I will walk you through seven steps designed to ensure post-exit financial security which allows for peace of mind.

1. Understand your Finances: In order to determine where you want to be, you must first understand where you are. Much like owners do within their businesses, this means getting a handle on your personal income and expenses. Pull your bank statements and start documenting your revenue and expenses on an annual basis.

2. Determine your Post-Exit Lifestyle: In this step the focus is more on expenses than income. What do you want post-exit and how much will that cost on an annual basis? Will you do more traveling? Do you have charitable giving plans? Do you want to fund education expenses? Do you want to begin a new business venture? Detailing your post-exit desires will help you determine the cost associated with those activities. Also, it is important to identify your “hidden expenses”. What expenses are currently running through your business that will have to be personally funded post-exit (e.g. country club dues, car payments, gas and travel)?

3. Generate your “Number”: Building on steps one and two, determine how much money you will actually need. You don’t want to “pick a number, any number.”  At this point, owners should build their advisor team, including a financial advisor who can model the information compiled for steps one and two to determine a realistic “number.” Given all the data, they can determine how much money you will need to live your desired lifestyle so that you don’t run out of money.

4. Personal Balance Sheet: Step 4 begins the process of compiling your personal net worth. Identify all current personal assets including: savings accounts; checking accounts; retirement accounts (401k/pension/IRAs); real estate; life insurance policies; and all other assets. For each account, pull your most recent statement to ensure accurate balances and summarize this information into a personal financial statement.

5. Business Valuation: For many, the value of your business will be the largest asset that will fund your “number.” In order to plan properly, business valuation experts work with clients to help owners understand that the value of the business may differ based on their desired exit scenario. The sales price associated with the sale to a third party may differ from the sale to insiders (management team or family).

6. Sales Price vs. Cash Flow: When discussing a potential transaction, it’s easy for owners to get focused on the sales price. However, funding your succession plan is going to be more focused on cash flow from the sale. As part of your advisor team, tax advisors work to determine the “net after tax proceeds” of any transaction scenario so owners can make an informed decision. As an exit advisor, my responsibility is to structure deals to ensure tax efficiency. Furthermore, when selling to a third party, I help owners understand potential post-closing adjustments that could affect cash flow.

7. Identify your Asset Gap: As you’ve worked through the previous steps, you determined: 1) what you need for your post-exit lifestyle; 2) personal asset summary and value; 3) business value and potential cash flow. Using this information, you can now determine whether or not your personal and business assets combined meet or exceed your “number.” If they don’t...you have identified your “asset gap” which leaves you with two choices: 1) increase the value of your business; or 2) adjust your post-exit lifestyle. Exit advisors understand the value drivers of your business and can assist owners in crafting and executing a plan to increase the value of their business.

In closing, all business owners should complete the seven steps above prior to jumping into other parts of the succession planning process. Understanding the goal of each owner is critical to crafting a successful exit plan.