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4 Experts & an Exit Plan: Confirming an Owner’s Financial Health

Submitted by John Brown on Fri, 03/15/2019 - 9:00am
A hospital with a brick façade and the word EMERGENCY in red letters.

In the prior article, we met fictional owner Carl Foley and his equally fictional advisor, Larry Spelling. When Carl informed Larry that he was ready to sell his company, Larry asked Carl to take him through his financial goals to gauge his financial health. Here’s what Carl told Larry:

  • He wanted his current income of $300,000 per year to continue after he sold.
  • He expected to sell his company for $3 million.
  • He expected to pay $500,000 in taxes.
  • His non-business assets were worth $1.5 million.
  • After adding his after-tax sale proceeds ($2.5 million) to his non-business assets ($1.5 million), his nest egg would be $4 million, from which he’d take withdrawals of $250,000 to $275,000 per year (i.e., 6–7% per year).
  • His Social Security benefits would make up the difference, so he and his wife could live on $300,000 per year.

We pick up our story there.

Larry understood that Carl was itching to sell, but he suspected that most of Carl’s assumptions were probably wrong. Larry also knew that simply listing all the reasons that Carl’s assumptions were wrong would get them nowhere and would put a quick end to their conversation. Instead, Larry took a different approach.

“Carl, selling your business is likely the most consequential financial and personal decision of your life. I can tell that you’ve given it a lot of thought, but what happens if your projections are off? Your exit is too important to base it on anything less than the most accurate information and advice available.”

“I see your point, but I don’t see where you’re going with this,” Carl responded.

“I want you to be absolutely confident that your projections are based on the best possible information. To do that, we’ll bring in some other experts, but only as necessary,” Larry replied.

“Here we go,” said Carl. “What’s this going to cost me?”

“Not nearly as much as you think,” answered Larry. “It won’t be expensive because I’ve already vetted the best advisors in our area and know their fees are reasonable.”

Larry handed Carl a few sample bios and quotes from the advisors he was talking about for Carl to review as he spoke.

“Think about it, Carl: You and your wife deserve to enjoy life after you leave your business. That’s why I’d like experts to confirm your numbers.”

“Fine, we’ll get an ‘inexpensive second opinion,’” Carl said, his reluctance slowly turning into a wry smile. “Just so I can prove to you that everything is lined up for me to exit my business and live the retirement life I’ve always imagined.”

With Carl’s agreement, Larry brought in four experts from his Advisor Team. They helped Carl re-evaluate his business’ financial health.

Expert 1: Business Appraiser

Larry’s experienced business appraiser calculated the value of Foley Steel at $2 million, as opposed to Carl’s $3 million. The appraiser explained that the lower multiple was due to two factors:

  • Foley Steel was overly dependent on Carl, a significant drawback for buyers.
  • Foley Steel’s EBITDA was facing multi-year stagnation. The appraiser explained that buyers pay less for companies that don’t exhibit strong growth.

The appraiser did not prepare a costlier valuation opinion. Instead, she used a calculation of value method that generally provides a valuation sufficiently accurate for planning purposes, but not an actual transfer.

Expert 2: Certified Public Accountant

Larry asked Carl’s CPA to estimate the likely net proceeds from the sale of Foley Steel.

  • He estimated Carl’s sale proceeds to be $1.5 million—rather than Carl’s estimate of $2.5 million—in part because taxes would take 25% of the $2 million Carl’s business was worth, rather than the 16–17% Carl assumed taxes would take from his assumed $3 million business.

This was a shock to Carl: His assumptions about the value of his business and the taxes he’d pay had compounded.

Expert 3:  Mergers & Acquisitions Advisor

The M&A advisor that Larry contacted estimated that Carl’s brokerage fees and other sale expenses would be around $200,000. This reduced Carl’s net proceeds to $1.3 million. He noted that Carl would be unlikely to receive all cash at closing, since most buyers would insist on a holdback or earnout of $250,000 or so.

Expert 4:  A Financial Planner

Larry’s recommended financial planner met with Carl and his wife to determine whether their current lifestyle did, in fact, require income of $300,000 annually. By asking focused probing questions, the financial advisor learned that Carl got that one right: He and his wife did spend his entire salary of $300,000.

Then, the financial planner told Carl that his post-exit annual income would be closer to $120,000 (plus Social Security) than $300,000. He explained that a reasonable withdrawal rate from Carl’s expected investment portfolio of $2.8 million (existing investments of $1.5 million plus the net proceeds of $1.3 million from the sale of Foley Steel) was 3.5–4%, definitely not 6–7%.

To demonstrate this to Larry, the planner calculated that the inflation-adjusted annualized S&P 500 Return (Dividends Reinvested) from December 1999 through December 2017 was 3.257%. Because Carl and his wife were healthy, exercising non-smokers, there was a 50% chance that at least one of them could live until age 98 and a 25% chance that one of them could live beyond age 104. The financial planner also cited the facts that health care costs were rising faster than inflation and that there was a less than 2% projected average growth rate for the American economy through 2050.

All of these facts (and more) led the planner to recommend that Carl use no more than a 4% withdrawal rate.

When Larry met with Carl to review all the expert opinions, the facts were clear: For Carl to exit and maintain his lifestyle, he needed investment capital of $7 million. Carl was $4 million short, even by his own presumptive estimates. Although Carl was down, he was not out: Because Larry had asked the right questions and had the right tools, Carl could start working to address the holes his assumptions had created.


  • It is essential to involve a team of experts to verify owners’ assessments and estimates.
  • To overcome an owner’s assumptions about their current and future resources, smart advisors point out the gap between what owners have and what they need.
  • The gap between the resources owners have (business and non-business) and the resources they’ll need to live the lives they want after they leave their companies is generally far greater than they imagine.
  • Exit Planning Advisors don’t lecture owners about the benefits of Exit Planning. Instead, they use experts to verify their clients’ assumptions and let the facts speak for themselves. Then, they offer assistance.

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