After business owners take the first step toward their business exits—which means determining how much money they need to achieve financial independence—they can move on to the next step. The next step is often difficult for business owners to confront. It requires them to shed their assumptions and illusions about their businesses. The next step is to determine their businesses’ Asset Gap.
Simply stated, the Asset Gap is the difference between what business owners have currently and what business owners must have to support their post-exit lifestyles. There are four aspects that typically determine whether a business owner has an Asset Gap and how big that Asset Gap is:
- The current value and expected growth rate of the business.
- The future performance of all non-business assets (e.g., investments).
- The amount of money the owner expects to spend after exiting.
- The life expectancies of the owner and the owner’s spouse.
Knowing that these four aspects determine the Asset Gap for business owners, how do advisors help business owners address the Asset Gap?
How Advisors Help Business Owners Address the Asset Gap
As advisors work with business owners on their business exits, they often find a common obstacle: Most business owners vastly overestimate their businesses’ current value and expected growth rate. They also overestimate how well their non-business assets will perform. Advisors can help business owners address these assumptions by connecting them with a financial planning professional and business appraiser. However, it’s not as easy as making introductions.
Consider how business owners think about their businesses. They’ve often built them from the ground up and dedicated countless hours to their success. Based on the time and work they’ve put into it, they’re likely going to value them much more highly than an objective appraiser. However, few owners will appreciate advisors who approach them by saying, “You are probably overvaluing your business.” Some might even view that as an insult. So, how can advisors help?
The best way advisors can address overly optimistic owners is by asking them questions. Questions like “How much do you think your business is worth?” and “How did you come to that conclusion?” get owners thinking about business value without implying that they are wrong. Additionally, advisors can use stories about other business owners who thought their businesses were worth more than they actually were and explain the consequences of those errors.
Most business owners tend to be “learn from your mistakes” people. However, when determining the Asset Gap, there simply isn’t enough time for owners to learn from their mistakes if they want to exit on their terms. It’s up to advisors to broach the subject carefully while establishing the importance and urgency behind determining the Asset Gap. The sooner business owners know what their Asset Gap is, the sooner they can address it and set themselves up for a successful business exit. Advisors must thread the needle of getting owners to act without insulting the time and effort they’ve put into their businesses.
How Advisors Help Business Owners Determine Post-Exit Necessities
Exit Planning Advisors must go an extra step when working with business owners. They must help owners determine what they expect in their post-exit lives. A business exit cannot be successful if the owner’s post-exit life isn’t supported by the business exit. Unfortunately, many business owners underestimate how much they will spend after they exit and how long they (and their spouses, if applicable) will live after they exit. What can advisors do about this?
To address the amount of money owners will spend post-exit, there are two surefire ways Exit Planning Advisors can help business owners. The first is to put them in touch with a financial planner (or if the Exit Planning Advisor is a financial planner, provide those services separately). A financial professional can guide business owners toward the best decisions to assure a comfortable post-exit life.
If business owners resist talking to (and paying for) professional financial services, Exit Planning Advisors can prime the pump with education. Generally, retirees tend to spend at least 85% of their pre-retirement spending after they retire. For business owners, this number is usually higher because they forget about or disregard perks that business ownership used to provide. By asking questions like “About how much do you spend in a year?” and “What kinds of things do you plan on doing after you exit?” advisors can get a sense for the lifestyle the owner intends to live. By comparing that estimate to the amount of money owners think they will spend post-retirement, advisors can get owners thinking about their assumptions and then acting on any misalignments.
Perhaps the most difficult discussion advisors must have with business owners about their post-exit lives is their life expectancies. Few people like to talk about when they will die unless they must. However, death plays a crucial role in successful Exit Planning, in terms of having enough money to live comfortably and then providing for those the owner cares about after death. Pushing the discussion of life expectancy off portends disaster for exiting owners.
An effective way to broach the life expectancy discussion is to frame it in terms of time vs. money. First, advisors can use a legitimate life expectancy calculator to show owners how long they’ll likely live. Then, they can turn the discussion away from the morbidity of death and toward what owners want to do with the rest of their lives by discussing the means they will need to achieve that lifestyle. This prevents owners from underestimating what they will need and minimizes the likelihood that they will have to go back to work late in life, which for some people is a fate worse than death.
Finally, advisors can frame the discussion in terms of how owners will transfer any money they did not spend to people or organizations they care about. Estate planning and wealth preservation are a crucial step in Exit Planning. By focusing on how owners will be remembered, rather than on their inevitable death, advisors can more smoothly discuss what owners need to do to make sure that they can provide for those they care about.
Most business owners either don’t know about the Asset Gap or don’t think they have one. Advisors are the key to helping business owners address their Asset Gaps. By broaching the topic carefully and addressing the four elements that comprise the Gap, advisors can help business owners begin the journey toward a successful business exit. For more information about the advisor’s role in addressing the Asset Gap, read our comprehensive eBook.