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An Estimate of Future Company Cash Flow

Cash flow is one of the most important factors in a business exit. Today, we look at why securing a professional estimate of your company’s cash flow is crucial to the success of your Exit Plan. All buyers, whether an outside third party or an insider (family member, co-owner, or key employee), will use cash flow as a way of measuring or confirming the value of the companies they buy.

While there are many definitions of cash flow, the one that we often use is free cash flow. Free cash flow is the portion of the annual net cash flow from operating activities that remains available for discretionary purposes after the business has met its basic financial obligations. In this discussion, the “discretionary purpose” is the buyer’s purchase of or return on investment for the owner’s interest in the company.

If you are contemplating a sale to insiders, remember that they likely do not have enough cash to finance the purchase. It may be the future cash flow of your business (once you leave it) that funds your buy out. As you can see, in transfers to insiders, cash flow can be both the measure and the means of ownership transfer. As such, it is important to estimate future cash flow as accurately as possible. This is not a “back of the napkin” exercise; a thorough analysis will give you more confidence in your plans for the future.

Once you have an accurate professional estimate of future cash flow, you can assess various Exit Paths, and your advisors can design an exit strategy that puts as much of that cash flow as possible in your pocket. Accurate cash flow estimates can also minimize the taxes you pay upon an ownership transfer. Remember, every dollar the IRS takes is one dollar less paid to you, regardless of whether the buyer or seller pays the tax.

Let’s assume for a moment that the company’s cash flow estimate indicates that it cannot support all of your Exit Objectives. You will then explore alternatives to your original plan and answer important questions:

  • Should you delay your departure date?
  • Should you focus your attention on a third-party sale and, if so, are a higher purchase price and/or more cash upfront possible?
  • Should you shift your focus to building cash flow and business value before you begin to sell ownership?

Securing an accurate estimate of future cash flow can help prevent you from choosing a dead-end Exit Path. It can give you confidence that you are on the right track or uncover areas that require more work before you can exit the business. For most owners, calculating estimated future cash flow is an integral part of creating a successful Exit Plan.

For more information about obtaining an accurate cash flow estimate, contact us today. We can help guide you through the process.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Setting Exit Goals for the New Year

With the new year upon us, many people have begun their journeys to fulfill their New Year’s resolutions. For business owners, it’s no different. Between creating goals for the business to achieve and assuring that the business keeps growing, owners will have much to consider this year. One of the goals most commonly shared by owners is to successfully exit their businesses over the next 10 years. Most business owners have a sense of how much longer they want to remain as owners of their businesses, and the new year is a perfect time to take control of the planning that can make the future successful.

In our experience, it usually takes a typical owner of a small to medium-sized business 5–10 years to implement an Exit Plan. That means that for many owners looking to exit their businesses within the next 5–10 years, their best chance at a successful business exit begins today.

As owners set out to begin creating a written Exit Plan, they may want to know that the most successful owners tend to establish their goals before they begin implementing a process. There are usually three types of goals that we see owners set as they begin the process behind their business exits:

  1. Foundational Goal: When planning a business exit, the foundational goal is financial independence. This means transferring ownership and receiving enough money to not have to work again unless you choose.
  2. Universal Goals: Universal goals are goals that nearly all owners aim to achieve. They include leaving the business when they want, for the money they need, and to the person or people they choose.
  3. Values-Based Goals: Perhaps the most influential type of goals, values-based goals are goals that revolve around your personal values and ethics. Examples include making sure the business isn’t shut down locally or maintaining a company culture after you leave. Often, owners don’t even realize they have values-based goals until late in their Exit Planning process, at which point it may be too late to address them.

Identifying the goals that are most important to you gives you the best opportunity to create a plan that addresses those goals. It also gives you a chance to see whether you have conflicting exit goals. Because a business exit usually affects more people than just the business owner, you may find, as you plan, that some of your initial goals stand at odds with other goals. By setting your goals before implementing a process to achieve them, you can determine which goals are most important and decide how to manage any conflicts in what you think will help you exit your business on your terms.

If you’d like to discuss your goals for your business exit and the steps that follow to create a thoughtful plan for the future of your ownership, please contact us today. We can help you map the things that you believe will be most conducive to the success of your business, your family, and yourself as you approach your business exit.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Must You Fire Your Managers to Grow the Business?

Building business value is a common goal among business owners. Many successful small business owners find that after years of growth, the company can begin to plateau. It can be frustrating if you and your longtime managers realize that all of the things that grew the business in the past aren’t doing the trick anymore. It’s especially frustrating if you realize that the cause of this stagnation might be your longtime managers themselves.

Today, we’ll look at a touchy subject: what to do about management teams that no longer produce the business growth necessary to support your ideal future.

Overcoming the plateau

Consider a fictional company, Big Brain Streaming Services. Over five years, one of the original co-founders and then-CEO, Riley Ruckus, had grown Big Brain significantly. Then, one of Riley’s biggest investors, Huey del Rocha, decided that he wanted to take over as CEO. Huey didn’t think Riley had the skills to continue growing the business. Huey demoted Riley from CEO to President. Over the next few years, Big Brain exploded under the guidance of its new CEO.

In this example, firing the CEO achieved the aim of growing the business. But if you’re like many small business owners, this can be a problematic solution, especially if you feel a sense of loyalty to your managers. The idea of demoting or firing people who helped you build the business might be unpalatable.

However, to effectively overcome plateauing business value, you’ll likely need to install a next-level management team. Next-level management teams are strong drivers of business value because they typically know how to build business value beyond what current management can do. As the Big Brain example showed, sometimes, the ideas that grew the company at first aren’t good enough to grow the company going forward. Sometimes, change is necessary, and that change comes in the form of an injection of new, more fitting talent.

Fortunately, you don’t necessarily need to fire current managers. Loyalty and change are not mutually exclusive. In addition to replacing current managers, you can take two other tracks to install next-level management and still abide by your personal code of loyalty.

Reassign current managers

In the Big Brain example, the new CEO replaced the old CEO because it was necessary for the business’ success. This is an important thing for you to understand. It is completely normal for growing businesses to replace all or part of an existing management team.

One way to split the difference between doing nothing and replacing everyone is to reassign current managers to more fitting roles. For example, your business may have an operations director who does incredible work when managing five people. But for your business to grow to the point where you can reach financial independence post-exit, it may need an operations director who can manage many more than five people. Rather than hiring an outside director and firing the current director, you can hire the outside director and move the current director into a role where their skill set is still valuable.

The consequence of taking this tack is that you’ve taken a step toward growing the business while giving your current manager the best chance to succeed, rather than throwing them in the deep end.

Retrain current managers

Current managers of successful businesses have obvious talent. Thus, it’s possible to retrain current managers to go above and beyond what they currently do. You can potentially train promising managers to continue building business value beyond what they’re producing today.

However, this strategy requires commitment and forethought. It may require outside counsel. You cannot simply expect current managers to “do more.” You must instead define what you expect from managers, make those expectations achievable, and reward managers for achieving and surpassing expectations. First, giving top managers access to training, education, coaching, and the like build their skill sets. Then, setting ambitious yet reasonable goals can motivate your current managers to use their new skills to grow the business as you need it to grow.

Conclusion

To continue growing your business, you may need to determine whether your current management team is the right group to grow the company appropriately. In terms of planning for your business’ future, “appropriate growth” means the amount of growth necessary to provide you with financial security when you eventually leave it.

If you’d like to discuss how to potentially grow your business while still being loyal to your current management team, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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How Do Business Performance and Health Affect Your Planning?

Many successful business owners don’t feel any urgency to plan for the futures of their businesses. When owners are comfortable where they’re at, they may struggle to plan with a longer view of their business futures, perhaps asking, “Why to change what works?”

One way to answer this question is to define what makes a business strong. Strong businesses are a marriage between performance and health. The difference between business performance and business health as follows:

  • Business performance is the business’ ability to win today.
  • Business health is the business’ ability to win tomorrow.

As a successful business owner, your business may perform well right now. But have you considered the shape of your business’ health? For example, many successful businesses meet or exceed various expectations based mostly on the owner’s presence. If that owner were to leave unexpectedly (via death, injury, or otherwise), the business would most likely suffer, if not fail altogether. In this example, the business may have a strong performance. But its health—its ability to win tomorrow—is in jeopardy because if anything were to go wrong with the owner, it’s likely that things will go wrong with the business.

Compounding that challenge is the fact that many owners are incredibly optimistic about themselves and their businesses. They may say, “We can worry about that when it’s time.” But the time to worry about the business’ health is now, especially if you, your family, and others rely on your business to support their lifestyles.

Let’s look at two ways you can marry business performance to business health.

Pinpoint problems in the context of how your business affects you and others

Business owners typically don’t answer to anyone. You’re likely the boss, the decision-maker, the interrogator. If your business consistently turns out a strong performance, you may question why you need to plan for your business’ future.

One way to confront this (sometimes false) sense of comfort is to ask yourself, “How does this business affect me and others I care about?” Though some answers may be obvious (e.g., “The business is my nest egg”), other answers may be less apparent. For example, you may ask yourself, “Can my business run smoothly without me?” If the answer is “no,” then how might that affect your family and employees if you were ever forced out of the business by death, incapacity, or something else?

Your business is likely a vehicle for financial security, but it might also be much more than that. If you want to eventually transfer your ownership to children, you should know whether your children want to run the business, whether they’re capable of running the business, and how any differences in management styles might affect the business. Likewise, if you intend to sell to a third party, you may need to determine whether you have a management team that can continue smooth operations.

An ounce of prevention is worth a pound of cure. Diagnosing your business’ long-term health often begins when you dig into how your business affects you and the people or causes you care about most.

Calculate consequences

Knowing how your business affects yourself and others give you a baseline to consider consequences. For example, your business may have enjoyed years of success. During those years, your business may have provided your family with a lifestyle that you could have only dreamed of when you founded the business. You may wonder why you would change what’s worked.

In this case, a question you might ask is, “Is this business that has provided my family and me with so much protected?” Even without going into vivid detail, the idea that your business might be vulnerable can get you to consider the consequences of not having a plan for future success. Perhaps there are threats or risks you’ve ignored for years because those threats and risks haven’t yet affected the business or simply because you don’t have a solution to address them. This is fairly common among successful owners.

By calculating consequences, you can focus on what it will take you to maintain the business’ long-term health. It can also encourage you to act, because other people may be counting on you.

Marrying business performance and health is rarely a one-person show. If you’d like to talk about how your business affects yourself and others, and what the consequences of not having a plan for future business success might be, please contact us today.

Special thanks to Chuck Hollander of Red Flag Advantage for providing the definition of a strong business.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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How Long Does Planning for Your Business’ Future Take?

One of the first questions business owners ask about exiting their businesses is, “Just how long is all of this supposed to take?” The true answer is it depends. There are many things to consider as you shape your Exit Plan. You might have a business that’s worth $10 million but is overly reliant on you for success. You might have a strong management team to take over but only one or two huge customers. Different obstacles provide different answers to “How long does this all take?”

Fortunately, there are some general guidelines for how long planning can take. However, Exit Planning timeline guidelines are primarily dependent on you. If you and your business are ready for an exit, advisors can shape and implement an Exit Plan for you. If neither you nor the business is prepared, planning will need to include a phase for getting both you and the business ready, as well as a phase devoted to designing and implementing the actual exit.

Time It Takes to Shape the Exit Plan

Shaping the actual plan can take as little as a few months. To quickly shape Exit Plans, you must have all the appropriate data; know what you have and what you need for financial independence; know which Exit Path you want to take and why.

However, though you may have ideas for what your ideal exit looks like, your ideas are likely loaded with questions you never considered. For instance, you may say that you want to transfer your business to your children. This raises questions such as “What if my kids don’t want it or can’t run it?” and “What if they can’t pay me for total ownership for 10 years or more?” Unless you uncover and address these questions, planning could take years (or never get done at all).

Often, delays in planning result from an owner’s uncertainty. Whether that uncertainty is about how much money they want, whom they want to transfer to, or whether they can see themselves not running a business, the owner’s uncertainty often causes delays.

Time It Takes to Fully Implement and Execute the Plan

Once you’ve shaped your plan for your business’ future, it’s time to implement and execute it. If you are ready to act, implementation and execution can begin immediately. Here are a few things to consider.

It Takes Time to Build Necessary Business Value

Building the necessary business value can be the longest part of implementing an Exit Plan. Many business owners have a sizeable gap between the resources they have and the resources they need to achieve their goals. This can mean that owners must increase the value of their businesses beyond what they’re worth today.

Compounding this challenge is the fact that you and your existing management may not have the know-how to grow the business further and achieve your Exit Goals. To build the necessary value, you’ll likely need a growth plan. A strong growth plan positions you and your management to implement strong Value Drivers in the business.

Different Exit Paths Have Different Timelines

Recall that you have two overarching options when you sell or transfer ownership. You can sell to a third party, like a strategic buyer, or transfer to an insider, such as a child or your employees. If you and your business are prepared for an exit, and you commit to pursuing a third-party sale, it’s possible for you to sell your business and be completely out within a year or so.

Typically, transfers to insiders take longer, even if you and your business are ready for your exit. The additional time is due primarily to incoming ownership’s financing capabilities. But the time it takes to sell a business to a third party or transfer to insiders is not primarily dependent on the nature of the Exit Path. It’s dependent on whether you are ready to exit and whether your business can support your exit.

Conclusion

In Exit Planning, time binds all decisions. As you look toward your future, whether your timeline is one year or 20 years, consider asking yourself, “Do I want to wait until I’m ready to move on to do all these things?” Experience shows that the answer is “No.”

If you’d like to explore your Exit Planning timeline, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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What You May Get Wrong About Business Valuations

Business valuations are important to successful planning. They tell you what your business is worth to a potential buyer. Though business valuations seem simple on the surface, even the smartest and most successful business owners can misinterpret their importance.

Business valuations generally tell you two things. First, they tell you whether you can sell or transfer your ownership, right now, and achieve financial independence. Second, and more importantly, they tell you how much more work you must do to build your business’ value to achieve that financial independence.

Financial independence is the most important goal of planning for your business’ future. Other goals are important. But by definition, an Exit Plan must give you financial independence to be successful. It’s likely that your business is the most valuable asset you hold and thus will play a huge role in achieving financial independence. Knowing what it’s worth and what you must do to build its value is commonly the bedrock of a successful plan for the future, whether you intend to exit or keep your business forever.

Consider the story of Luca Montez, a business owner who made some common mistakes about business valuations, and how his mistakes affected his planning.

Luca Montez had owned his widget company, MontezCo, for 35 years. He was an integral part of the company’s success. When his acquaintance and friendly competitor, Julia Deming, told him that she was selling her business, Luca started thinking about his own retirement. He was very excited to learn that Julia received $6 million for her business. He saw their businesses as similar and figured he could get that much, too.

Julia offered to put him in touch with some of the advisors that had helped her, but Luca politely declined.

“No, that’s too expensive I bet. I know what my business is worth now. I think I can handle it.”

Luca decided to put his business on the market. The highest offer he received was for $2 million, much lower than what Julia had been offered. He became frustrated and asked Julia to put him in touch with some of her advisors.

When Luca met with the Advisor Team, he vented his frustrations.

“My company is bigger than Julia’s. I work with some really well-known customers. I put a lot of work into making this business successful. Why am I not getting the same $6 million as Julia, if not more?”

After a few meetings and a lot of questions, Luca grudgingly agreed to get a proper business valuation. He had resisted for quite some time because he was convinced that his company was as valuable as Julia’s, and he didn’t want to pay for a formal “opinion of value” at top dollar. His advisors instead suggested that he get a less expensive “calculation of value” from a business valuation specialist.

Using a calculation of the value process, Luca’s business valuation specialist said that Luca’s business was currently worth $2 million, just as he had been offered. She explained that the company had three glaring weaknesses.

  1. It was too reliant on Luca for its cash flow.
  2. It worked with three well-known customers, but those companies represented 80% of MontezCo’s annual sales.
  3. It didn’t have a management team that could run the company without Luca, so a buyer would be stuck with Luca for several years or provide their own management team.

Once Luca learned these facts, he and his Advisor Team knew they needed to get to work. They began to install next-level management. This made the company less reliant on Luca. The management team also knew how to diversify MontezCo’s customer base. As the company grew, Luca created incentive plans to keep his best managers tethered to the company, with help from his advisors. It took several years, but Luca managed to build his company’s value and get the $6 million he wanted and needed.

Business valuations can guide you toward several answers about the future of your business. Perhaps most importantly, they can tell you where you are financially, which can guide you toward what you must do to get to where you want to be.

If you’d like to talk about strategies to position yourself to achieve financial independence through your business, please contact us today.

Please note that the advisor providing this information may not offer business valuation services.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Optionality and Your Plans for Your Business Future

When many business owners first think about their business futures, their first question is, “Whom am I going to sell this business to once it’s my time to leave it?” It makes sense for owners to ask this question first since the answer to that question can guide how their futures look. But this is a backward way of shaping a plan. Consider the short story of Bob Roberts.

Bob Roberts had had 40 years of success running his hometown disposal company. He was ready to sell to a third-party buyer who had approached him a year earlier. The buyer told Bob that they were willing to pay him $6 million for his business, which Bob thought was more than enough to last him through his retirement. Bob always wanted to sell to a big player and retire in style.

Not long before Bob was set to close the deal, he received startling news. The buyer planned to absorb Bob’s fleet of trucks and book of business and lay off 47 of his 50 employees. Bob cared far too much about his employees to let that happen. He demanded that the buyer keep his employees as a condition of the sale. The buyer refused, and Bob took the business off the market.

When Bob tried taking his business to market a few years later, he couldn’t find anyone who wanted to give him even half of the original offer. He had tainted the marketplace by taking his business off the market early, and he still felt the negative consequences. He found himself wishing that he’d taken the original offer and that he didn’t care so much about his employees.

In this example, Bob didn’t realize how important one of his values-based goals was because he never examined it. He dove headlong into pursuing what he thought was an ideal path. In reality, his ideal path was fraught with problems he could have avoided.

Optionality in Planning

Optionality is “the value of additional optional investment opportunities available only after having made an initial investment.” In terms of planning for your business’ future, optionality means your ability to choose an ideal Exit Path while still having the option to pursue other paths as backups. The “initial investment” is setting your goals and determining your resources. The “additional optional investment opportunities” are the Exit Paths you give yourself options to choose from. This optionality is extremely important because your conditions, situations, and wants can change as you plan for a successful future.

To most business owners, choosing their ideal Exit Path is the result of planning. Because business owners are typically results-driven, it’s where they want to start. However, before pursuing a path, you should determine whether your chosen path can achieve your goals and whether you have the resources to pursue a given path. Doing so creates optionality.

Optionality is valuable in planning because it gives you the freedom to pursue your future business goals on your terms. Optionality cannot exist unless you know your goals and resources. Choosing an ideal path isn’t the end of planning: It’s the means to the end.

Generally, there are four paths you can take to continue the business after you leave it.

1. Third-Party Sale

2. Transfer to Employees or Management

3. Transfer to Children

4. Sale to an ESOP

Regardless of which path you choose, one thing is almost always true: It’s unwise to pursue a path unless you know what your ideals and resources are. For example, an owner who wants to exit their business in six months but sell to an insider will probably be unable to choose an ideal path at the outset. Only after weighing why they want what they want against how to get what they want can owners begin to seriously consider any path.

You may have ideas about what your ideal planning path might be. You may want to start the conversation there. But we encourage you to examine your goals and resources before committing fully to any given path. If you’d like to discuss how your ideal path lines up with your goals and resources, please contact us today.

The information contained in this article is general and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to advise on all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Shaping Your Plans for a Successful Future

When we talk about planning for the future, we often talk about creating a plan. The idea of creating something as big as a plan for the future can imply a ton of from-scratch work (as is often the case), which can cause you to want to put that ton of work off to another day. As a successful (and likely busy) owner, you may not think you have time to create a plan. However, there’s good news, because when it comes to planning for a successful future, it’s more a matter of shaping than creating.

Shaping a Plan vs. Creating a Plan

You understand how much work creation requires. You created your business, its processes, and most of the aspects that make the business successful. As you age and approach the next stage in your business life, you may not want to put that kind of work into a plan for the future. How, then, can you avoid the feeling of helplessness that can come from knowing you have something big to do and either no drive or guide to pursuing it?

The key is to reframe creating as shaping.

This isn’t merely a semantic trick. You likely have a general idea for what you want your future to look like, even if you don’t have a formal plan. For example, you may have an idea for when you want to be out of your business. You might have a preference for who will take over once you exit. You might have desires for what you will do with all the money you’ll have from successfully selling or transferring your business. The ideas are there. They simply don’t have any shape.

How can you give these nebulous but high-potential ideas shape? It all starts by collecting data and setting strategy.

Collecting Data and Setting Strategy: Step 1 in Shaping a Plan

Planning cannot truly begin unless you know what you want and need. For example, can you confidently say exactly how much money you’d need to one day exit your business with financial security? Do you know what it would take for your family to continue living their current lifestyles if you chose to never exit your business or, worse, were forced from your business (by death, incapacitation, or otherwise)? These are big, introspective questions that have real, often negative consequences if left unanswered. How can you approach them and still successfully run your business?

A good way to begin shaping your plans is to collect data and set a strategy. To do this, you should start by establishing a few objectives.

Establishing Objectives

Though there are many facets to a successful plan, there are three overarching objectives that you should establish. Without knowing these three objectives, it’s nearly impossible to shape a successful plan for the future.

  1. The Foundational Goal – Financial Security: Absolutely no plan for the future can ever be considered successful unless it achieves financial security for you and your family members. Your financial security goal is unique, so avoid temptations to compare what would make you financially secure with what makes others financially secure. You should determine what it takes to achieve financial security first and foremost.
  2. Universal Goals – When, for How Much, and to Whom: Given all the work you’ve put into building your business, you’ll likely want a say in when you eventually leave or transfer your business, how much you get for your business, and to whom you leave your business. Once you begin to think about these wants, you may find that you want solutions to the questions these want to create, such as “How can I get the money I need?” and “Why do I want to transfer my business to this person?” Determining universal goals takes your nebulous ideas and shapes them into actionable goals.
  3. Values-Based Goals – Keeping Principles Intact: A common stumbling block for owners is uncovering their values-based goals. These goals are basically living principles. For example, you might want your company to remain in your community after you sell or transfer it. For many owners, this desire can be so strong that they’ll gladly take less than the top dollar (but still achieve financial security) to see it through. Unfortunately, many owners don’t realize how important their values are until the moment it’s time to exit, at which point, it’s often too late to do anything about it without throwing the entire plan into chaos. Though this part of data collection is equal parts art and science, it’s important for you to uncover and address your values-based goals early.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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When to Get the Advisor Team Involved

As a reminder, the EPIC™ Process includes five meetings or stages:

  1. Data Collection
  2. Strategy and Design
  3. Preliminary Plan Presentation to the Business Owner
  4. Final Plan Presentation to Constituents
  5. Implementation

The Data Collection meeting and the Strategy and Design phase are typically one-on-one processes between you and your client, although other Advisor Team members or outside professionals may be involved to the extent that you need a business valuation, cash flow projection or financial needs analysis.

Once you’ve entered all of the relevant information from the Data Collection meeting (using the EPIC™ Fact Finders), you are ready to bring in the other Advisor Team members for purposes of plan design and problem-solving. You will have identified Recommendations that may be appropriate and can share your information with the Advisor Team in a single organized and concise format that they will use to provide input to the process — this is the Business Owner Road Map.

The EPIC™ Road Map acts as a centralized location for all facts, objectives, and Recommendations.

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Thinking Through Key Person Life Insurance

Key Person Life Insurance is a planning tool that many business owners and advisors spend too little time and attention on. Careful planning includes an analysis of:

  • Who is truly “key” to the company’s ongoing operations and success?
  • What is the risk or potential harm to the business if a key person dies?
  • During what period of time is it appropriate to insure against the risk of loss?
  • What will happen if a key person departs for a reason other than death?

Key Person Life Insurance is an important tool that should not be overlooked or oversimplified. Learn more about the use of this strategy in Exit Planning by listening to the Key Person Life Insurance Webcast on the BEI Member Center.

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