PREFER TO READ? Jump below the timestamps and you can!
Timestamps:
00:00 Introduction
01:17 Financial Planning, Not Just Investments
02:24 Case Study Overview
03:30 Meeting the M&A advisor
05:21 Meeting with the financial Planner
07:01 The NUMBER you should know – Your Wealth Gap
07:21 The rest of the story
08:41 Blooper
Most small business owners are unaware of one vital number that can have a massive impact on their future. In this post, we’ll dive into the second part of an exit plan: your financial goals. Specifically, we’ll explore what it means to have a financial plan in the context of your exit strategy.
If you missed the first post, Business is Personal, we discussed the three essential parts of an exit plan. The first part focused on the business, and we explained why many owners approach exit planning the wrong way. Now, let’s move forward and talk about financial planning and the critical number you need to know for your exit strategy.
The Misconception of Financial Planning
Many business owners believe they have a financial plan because they’ve invested in the stock market through a financial advisor. However, financial planning involves much more than just investments. Today, we’ll unpack why it’s crucial to go beyond simple investments and look at the full picture.
The financial services industry has often done a disservice to business owners by making financial planning seem solely about investments. Investments are merely a tool to help you achieve your financial goals; they aren’t the goals themselves. To build a comprehensive financial plan, you must address five key areas:
- Retirement Planning
- Investments
- Insurance and Risk Management
- Tax Planning
- Estate Planning
Each of these elements must work together to ensure that your financial goals are met. Missing even one of these components could lead to the collapse of your entire plan. To truly understand the importance of a solid financial plan, let’s look at a real-life example.
Bill’s Story: The Importance of Financial Planning
Meet Bill, a 62-year-old business owner who runs a successful solar panel company. Bill has been experiencing some health issues and is considering retirement to spend more time with his family. While talking with friends in the industry, Bill learned that one of his peers sold his business for $2 million. Feeling confident, Bill, who owns a larger and more established business, expected to sell his company for $4 million.
Bill decided to reach out to an M&A (mergers and acquisitions) advisor to assess the value of his business. After an initial meeting, the advisor promised to follow up with more information. A few weeks later, the advisor returned with promising news: there were two potential buyers that were interested in expanding into Bill’s market. It looked like Bill’s goal of $4 million could be within reach.
Excited about the future, Bill and his wife began planning for retirement—dreaming of family trips and finally purchasing the mountain home they always wanted. A few months later, Bill received a letter of intent for exactly $4 million. He was ecstatic and began setting the wheels in motion for the sale.
The Wealth Gap: The Number Bill Didn’t Know
As the sale date approached, Bill decided to meet with a financial planner to ensure everything was in place. The planner went through all the key areas: retirement, investments, taxes, insurance, and estate planning. However, after a thorough analysis, the planner delivered some sobering news.
While Bill thought the $4 million sale would be enough to secure his retirement, after taxes and paying off business debts, he would only be left with about $2.6 million. This revelation left Bill stunned, as he had planned his future around a much higher figure.
What Bill didn’t know—and what every business owner should know—is his wealth gap. The wealth gap is the difference between the value of your business and how much money you need to live comfortably and achieve your goals. In Bill’s case, his wealth gap was significant because he hadn’t accounted for the various deductions and financial obligations that would reduce his sale’s net value.
The Consequences of Not Planning
With his dreams shattered, Bill went back to work to try and bridge the gap in his retirement plan. Unfortunately, six months later, Bill suffered a stroke, which forced him to step down from his role. Without his leadership, the business began to struggle, and ultimately, it sold for just over $1 million—far less than Bill’s original goal.
Lessons for Your Exit Plan
Bill’s story is a powerful reminder of why business owners must have a financial plan that covers more than just investments. If you’re thinking about your exit strategy, ensure you have a plan that addresses:
- Retirement Planning: Understand the income you’ll need in retirement.
- Investment Strategy: Ensure your investments align with your long-term financial goals.
- Insurance: Have the proper coverage in place to protect your wealth and manage risk.
- Tax Strategy: Plan for the taxes you’ll incur from selling your business and find ways to mitigate them.
- Estate Planning: Make sure your assets are protected and efficiently transferred in case something happens unexpectedly.
Is There Any Good News? Yes!
The painful outcome that many owners face is almost entirely avoidable. Of the 20% of small-medium-sized businesses that sell, there’s a common theme–the owners almost all had an exit plan. They knew their wealth gap and how much money they needed out of their business upon sale to meet their goals. If you determine your own wealth gap, you can use this number as a target for your business valuation.
Then, as you make business decisions, you can assess each decision through the lens of “will this decision lead me closer to my needed valuation or further away?” With a little effort now, you can avoid the mistakes Bill made and ensure a smoother, more secure transition when it’s time to sell your business.
What To Do Now
I hope this post has provided you with valuable insights into financial planning and how it plays a critical role in your exit strategy. Remember to focus on the number that matters most: your wealth gap. Understanding this number can make all the difference in achieving your financial goals. If you would like help getting started, be bold–schedule a free strategy call today.