5 SMART Questions to Ask Business Owners About Financial Security

Submitted by John Brown on Fri, 02/22/2019 - 6:00am
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In the prior post, we introduced the five characteristics of actionable goals using Peter Drucker’s SMART acronym:

  • Specific
  • Measurable
  • Accurate
  • Realistic
  • Time-Limited

Let’s apply those standards to the most important exit goal business owners have: attaining financial security for the duration of their post-business lives.

The Owner’s Financial Security Goal

The cardinal rule of Exit Planning is simple: No business exit is successful if it does not leave the selling owner financially secure.

To achieve Exit Planning success (i.e., the owner’s financial security), Exit Planning Advisors cannot rely on owners’ assumptions or guesses about how much cash they’ll need to be financially secure after they leave their companies. Instead, Exit Planning Advisors must use all of the tools at their disposal to quantify how much income their business-owning clients will need to live the post-exit lives they desire. One of the best tools advisors use is the SMART standard.

Is the Business Owner’s Financial Security Goal SMART?

To assure that business owners can act on their financial security goal—rather than setting the bar too high to achieve or too low to succeed post-exit—advisors must ask five SMART questions:

1. Is It Specific?

Exit Planning Advisors don’t strive for absolute precision in every facet of Exit Planning. Advisors recognize that circumstances change and that business owners must adjust their plans to those changes. However, determining an owner’s financial security goal is not one of those areas. If this number changes at all, it will be upward: Rarely do business owners find that they need less money throughout their post-exit lives than they did before they exited.

2. Is It Measurable?

As a matter of course, Exit Planning Advisors quantify the amount of investment assets needed to produce the post-exit income owners require. If an owner’s goal is to exit in five years, Exit Planning Advisors can periodically measure whether business or asset values are growing at the rate necessary to meet that target. With proper planning, owners and advisors can make course corrections.

3. Is It Accurate?

The financial security goal needs to be accurate in that it realistically reflects an owner’s true need. If owners set unrealistically low goals, they may achieve them but will not have what they need to live the post-exit lives they desire.

In general, owners want to maintain their existing lifestyle post-exit, so they set their current income level as their financial security goal. Too many advisors accept that goal as accurate without question. This is unreasonably risky for advisors to do, because many owners do not:

  1. Know how much they currently spend.
  2. Recognize the value of their non-compensation benefits (e.g., health insurance, telephone, automobile, dining expenses).
  3. Realize that they are likely to live much longer than they expect.

It is the advisor’s job—not the business owner’s—to nail down the amount of income owners will need after they exit their companies. Financial planners do this for their clients every day. Exit Planning Advisors who are not financial planners know that determining an owner’s lifestyle spending needs is critical to the success of the Exit Plans they create. That’s why they recruit experienced financial advisors to perform this task.

Business owners tend to downplay their need for post-exit income, possibly because a lower dollar amount makes it easier for them to find a buyer and remove the pressure and stress they believe selling the business will bring. Other owners don’t anticipate that after they exit, they’ll likely spend at least 70–85% of what they spent pre-exit. Based on the costly activities that boomers are undertaking during retirement and the ever-rising cost of health care, many experts—including Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania—recommend that boomers aim "for a 100 percent replacement rate instead."

Advisors cannot base the calculation of how much income owners and their spouses will need for the rest of their lives on what they think they will need. Instead, advisors must rely on analysis, preferably guided by an experienced financial planning professional, that sets forth the level of income owners need to enjoy their desired lifestyle post-exit.

4. Is It Realistic?

Picture an owner who thinks he can exit his business at any time because he believes that his business is worth $5 million. His annual revenues for the past five years have not topped $1 million. He has no management team. The company has little profitability. Yet, this owner believes his business is worth $5 million, and he’s making assumptions about his exit based on this belief, which is not supported by analytics in the slightest. This scenario is commonplace when business owners first consider their exits, and it’s up to advisors to provide reality checks.

Advisors provide reality checks in two distinct ways:

  1. Insisting on a formal valuation rather than relying on the owner’s estimate.
  2. Asking owners how they plan to grow revenue quickly, since fewer than 10% of businesses grow faster than 5% plus cost of capital a year

The best way non-financial advisors can help business owners set an accurate and realistic financial security goal is to recruit expert financial advisors to their planning teams. Financial advisors who are also Exit Planning Advisors can simply apply their expertise in financial planning to this portion of the Exit Planning Process.

5. Is It Time-Limited?

“Growing personal investments from $800,000 to $950,000 by December 31, 2019,” is actionable. “Growing personal investments from $800,000 to $950,000,” without a set date, is not actionable because this goal has no deadline.

Time-limited goals have two benefits:

  1. They prompt owners to act in their own interests.
  2. They demand performance and hold everyone (owners, management, and advisors) accountable.

Having general conversations with owners about their goals is a start. But unless advisors move that discussion toward a commitment for owners to set SMART goals, most owners will continue to float along, doing nothing, because nothing is required.

What About Other Exit Goals?

Financial security is the foremost goal that must be SMART. However, other exit goals—such as how much money owners want to have when they exit, whom they want to run their company after they leave, and the date they wish to exit—must also be SMART. For example, if an owner wants to transfer ownership to management, advisors must know who that is, when they will start to receive ownership, how much ownership they’ll receive, what specifically must occur for ownership transfers to transpire over the time frame of the transfer, and so on.

But financial security remains key. Once advisors establish exactly what financial security means to owners, the next step is to calculate two things:

  1. The resources needed to achieve that goal.
  2. The value of the owner’s existing personal and business resources.

Bridging any gaps between the resources owners have today and the resources they must have to be financially secure is critical. In our next post, we’ll discuss how to overcome the challenges advisors and owners face in accurately ascertaining existing and needed resources.


  • Owners often make incorrect assumptions about their exit goals. Advisors must properly probe those goals and assumptions to assure that they are SMART.
  • No business exit is successful if it does not leave the selling owner financially secure.
  • Garbage in, garbage out: Basing an Exit Plan on untested assumptions is a game of chance. Accurate information provides the foundation for successful exits. For owners to exit on their terms, advisors must know what, specifically, those terms are.

An owner is not the best source for estimates of the amount of annual post-exit income needed to maintain current lifestyle. An experienced financial planner is. Experts are equipped to rebut an owner’s misguided assumptions

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