So far, this series has highlighted how a proven Exit Planning process, specifically, The BEI Seven Step Exit Planning Process™, helps business owners and their advisors set goals. Today, we describe Step Two of the Process in terms of how ascertaining the Asset Gap, which is the difference between the resources owners have today and the resources they will need to achieve their financial security goal, is advantageous for business owners and their advisors.
Ascertaining the Asset Gap: Benefits for Business Owners
In Step Two, business owners narrow their focus to cash flow and value. They look at two factors to determine whether they have an Asset Gap:
- The current value of their businesses and existing non-business investments.
- The asset value (both business and personal) that they must have to support their desired post-exit lives.
Then, with the help of their Exit Planning Advisor Team, owners determine how large their Asset Gap is. This process is called the Gap Analysis.
The Gap Analysis is a critical tool in creating Exit Plans that incorporate the actions, deadlines, and assigned responsibilities necessary to achieve an owner’s exit goals. A Gap Analysis provides business owners with several benefits:
- A proper Gap Analysis gives business owners an accurate assessment of how close they are to achieving their exit goals, providing owners, their management teams, and the Advisor Team with a framework in which to develop and execute strategies to close the distance between where the owners are and where they need to be.
- As business owners learn that they are farther from achieving their financial goals than they thought, they become more motivated to immediately and energetically increase business value and cash flow. This contrasts with the blissful ignorance that characterizes most owners’ thoughts about their exits, which keeps owners from acting.
- Conversely, business owners who discover that there is a small or no gap can focus directly on other aspects of the Exit Planning Process, including choosing the best Exit Path and deciding what to do with their post-exit money.
- By completing a Gap Analysis, business owners gain a realistic understanding of how much time, effort, and capital it will take to get from where they are to where they want and need to be. Without that data-based understanding, owners tend to make incorrect assumptions that not only lead to inaccurate or aimless planning but also prevent planning from even starting. Common incorrect assumptions include:
- The amount of income they’ll need after they exit.
- How long they and their spouses will live.
- The expected rate of return on invested assets.
- The value of their companies.
- The likely rate of growth in business value and cash flow.
- The net proceeds expected from the sale of their companies.
Incorrect assumptions typically cause business owners to underestimate how much capital they’ll need to achieve their needed and desired post-exit incomes, and overestimate how much capital they’ll have available after their exits. Similarly, owners tend to underestimate how much time they’ll need to grow value, cash flow, and income-producing assets. The BEI Seven Step Exit Planning Process—specifically, Step Two—addresses this problem comprehensively by urging owners to tangibly outline their goals and resources, pushing assumptions out of the equation.
Ascertaining the Asset Gap: Benefits to Advisors
Advisors who practice The BEI Seven Step Exit Planning Process can do two things more consistently than advisors who do not:
- Ask the right questions to acquire the information they need.
- Recruit the right advisors to replace their business-owning clients’ assumptions with facts.
Proper questions and expertise are critical to dispelling business owners’ mistaken assumptions, quantifying business value, and determining the size of the Asset Gap. Those questions and expertise form the basis of the advisor’s professional opinion, which smart business owners usually implement in their Exit Plans. For example, business owners often find it difficult to argue with an experienced financial planner’s calculation of the post-exit income they will need (or want).
Ascertaining the Asset Gap through The BEI Seven Step Exit Planning Process provides advisors with additional benefits:
- When advisors base their planning efforts on accurate assessments of a business owner’s available resources (business value, future cash flow, and income from non-business assets), the likelihood of Plan success increases dramatically. This allows advisors to justify their planning fees and serves as an excellent opportunity for future referrals.
- Using a process to obtain information coordinates and organizes the information-gathering efforts of the various professional advisors involved in the Exit Planning Process, allowing the Process to proceed smoothly and giving business owners greater confidence in their advisors’ skills.
- Overcoming a business owner’s incorrect assumptions jump-starts an owner’s commitment to the Exit Planning Process, making the advisors’ services indispensable to the Process.
- Using outside experts (e.g., a valuation expert) allows advisors to plan both time- and cost-effectively.
Start the Conversation About Value
When engaging business owners about committing to the Exit Planning Process, advisors must begin by helping their clients set goals, followed by a frank discussion of the resources available and the resources necessary to achieve those goals. BEI Members have found the following to be great conversation starters:
- “What is your business worth today? How do you know that?”
- “At what rate do you expect your business to grow from now until the date you’ve chosen to exit? What are you basing that estimate on?”
- “How much money do you need from a sale or transfer of your business to live the post-exit life you want?”
- “What is the present value of your assets outside the business?”
- “What is the average rate of return you expect on your assets before you exit? What rate do you expect after you exit?”
- “How long do you expect yourself and your spouse to live?”
Asking questions like these, listening carefully to owners’ responses, and using other professionals to ensure accuracy all provide Exit Planners with the solid informational base they need to help their clients move forward with the Exit Planning Process.
The first two Steps of The BEI Seven Step Exit Planning Process do not rely on any individual advisor’s professional tools, products, or solutions alone. They rely on the owner’s needs, goals, and aspirations. Inevitably, this owner-centric Plan requires professional input, tools, products, and services from different advisors. That’s why Exit Planning Advisors need to assemble the best possible Exit Planning Advisor Teams they can.
In the next several posts, we will tackle three elements of Step Three—preserving and growing value—in terms of how they benefit owners and their advisors.