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Turning Faulty Misperceptions Into Successful Exit Planning

Submitted by John Brown on Fri, 03/08/2019 - 9:00am
A man with dark hair sitting in a booth looking at a laptop with his head in his hand.

In our prior post, we discussed the two faulty misperceptions business owners have that can cause them to put off or flat-out refuse engaging in successful Exit Planning.

  1. They think they currently have enough resources to leave any time they choose.
  2. They assume that the time between when they start preparing to exit and actually exiting is enough to accumulate the financial resources they need to support them for the duration of their post-business lives.

Today, we’ll see how these assumptions affect owners who think they don’t need Exit Planning help (or at least don’t need it anytime soon). Consider the case of Carl Foley and his advisor, Larry Spelling.

Carl Foley felt he was in the catbird seat: He had started his company, Foley Steel, over 25 years ago, and it was as successful as he’d imagined it would be. Now that he felt ready to exit, he was confident he could sell and maintain his current level of income post-exit. While he was ready to go on with life without Foley Steel, Carl hadn’t given much thought to whether Foley Steel was ready to move on without him.

During a routine meeting with Larry Spelling, one of Foley Steel’s advisors, Carl mentioned that he was ready to sell. He asked Larry to refer him to a deal attorney and investment banker.

Fortunately for Carl, Larry was familiar with Exit Planning. He knew the importance of basing all planning on accurate assessments of the owner’s goals and the resources available to accomplish those goals. Instead of recommending a couple of M&A advisors, Larry first asked Carl whether he’d like to do some Exit Planning.

“Not necessary,” replied Carl. “Between my business and my investment portfolio, I’ve got everything I need to live the way I want to live.”

“That’s great,” Larry replied. “Most of my clients aren’t so lucky: What they have just won’t support the lives they want to live after they leave their companies. But tell me, what are your goals for your exit?”

“They’re pretty basic,” said Larry. “I want to exit soon and be cashed out when I leave. Then, I want to continue to live on the same $300,000 per year that I live on now.”

“That makes sense,” observed Larry. “But tell me about the business. How much do you think it will sell for?” Carl really warmed up to this topic and explained, “I think I can sell Foley Steel for $3 million. After taxes, that nets me $2.5 million.”

“Got it,” nodded Larry. “But tell me how you came up with $3 million.”

“Well, Foley Steel’s EBITDA and revenue have held steady at $500,000 for the last four years. I’ve heard that companies like mine sell for about six times EBITDA,” explained Carl.

“And your non-business assets?” asked Larry.

“I’ve got a portfolio, including real estate, of about $1.5 million,” Carl answered. “So, with my business proceeds at $2.5 million and portfolio at $1.5, I’m at $4 million.”

“That’s a nice nest egg,” agreed Larry. “Have you thought about the rate at which you’ll withdraw from it?” Larry asked.

“I have,” said Carl. “I think 6–7%, or $250,000 to $275,000 a year, should be safe. Add my social security to that and my wife and I continue to live on our $300,000 per year.”

Larry nodded silently.

“You see Larry,” Carl concluded, “I don’t need to do any planning. I’ve got everything I need to exit right now.”

This is a common conversation that owners and advisors have with each other. Most business owners, especially the smart ones, hold strong yet unsupported opinions regarding how prepared they are to exit and how prepared their companies are to be exited.

As we will see, Carl misjudged six things about his exit:

  1. The value of his business.
  2. The value of his non-business assets.
  3. The likely sale price for his business.
  4. His tax bill on the sale proceeds.
  5. A safe withdrawal rate.
  6. His (and his wife’s) lifespan.

How can advisors help business owners overcome their confident but often misinformed assertions that they can exit successfully whenever they wish?

The Effective Misperception-Smashing Strategy

In our preceding story, Larry did a great job asking Carl all the right questions to start a successful Exit Planning conversation. But how did he convince Carl to put aside his misperceptions, face facts, and engage Larry to create an Exit Plan?

Question the Assumptions

Advisors must be critical of owners’ perceptions and estimates of their resources. Good advisors never accept their clients’ perceptions and estimates at their face, because more often than not, they’re wrong. Instead, advisors must replace their clients’ hunches with accurate data that they, or other experienced expert advisors, provide.

Larry suggested to Carl that they bring in experienced advisors to verify Carl’s understanding of the value of his existing resources and the value of the resources he’d need to achieve all of his goals and aspirations. Of course, advisors must know the right experts to recommend, which is why forming a network of skilled advisors in related professions is a central tenet of Exit Planning as we practice it.

Bring in Experts

Instead of relying on owners’ estimates about business value, Exit Planning Advisors use four tools to determine business value:

  1. An opinion of value by a credentialed business appraiser.
  2. An appraiser’s calculation of value.
  3. Valuation software.
  4. An investment banker or business broker’s estimate of likely sale price if a third-party sale is contemplated.

Exit Planning Advisors also create Advisor Teams chock-full of expertise. They’ll involve a CPA (or CFO) to project future business cash flow. They involve a financial planner or fee-based investment advisor to determine an appropriate investment return and investment withdrawal rate. As you can see, Exit Planning can take a village. But given its importance in the business owner’s life, it’s necessary for advisors to gather the best experts to allow their clients the best chance at exiting on their terms.

In our next post, we’ll see how this approach played out with Carl.


  • The reason most owners don’t engage in Exit Planning is that they don’t believe they need to plan.
  • Owners don’t think they need to plan because they’ve miscalculated one or more of the following: (1) the value of their businesses and/or non-business assets; (2) the likely sale price for their businesses and/or taxes they’ll pay on the transaction; (3) the rate at which they can safely withdraw from their portfolios; and (4) the length of their lifespans.
  • The most effective way to persuade owners that they do need to plan their exits is to question the basis for their assumptions then use outside experts to rectify their calculations.

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