In the prior post, business owner Carl Foley and his advisor Larry Spelling were at a crossroads. Larry had provided Carl with four expert opinions related to the assumptions Carl had made about the following:
- The current value of his business.
- The likely sale price of his company.
- The amount of cash he’d have to invest after taxes and transaction fees.
- The amount of annual income that he and his wife would need to continue their lifestyle.
- The safe withdrawal rate from his investment portfolio.
- The length of time that portfolio would need to last.
Carl was shocked and disturbed to learn the true size of the gap between where he was and where he wanted to be. Like most owners who get a formal look at their resources, he was stunned to learn that he didn’t have nearly the financial resources he thought he did or the resources he’d need to support himself and his wife in their post-exit lives.
This realization prompts most owners to act. Successful owners like Carl don’t get to where they are by ignoring reality. Once they see the size of the task ahead, they want to know their options.
To recap, here’s the reality Carl faced:
- His company was worth $2 million, not $3 million.
- His sale proceeds would likely be $1.3 million, not $2.3 million.
- He’d incur capital gains taxes at the rate of 25%, not 16–17%.
- His sale expenses would be close to $200,000.
- A buyer would not likely pay him entirely in cash.
- The safe withdrawal rate on a nearly $3 million nest egg ($1.3 million in sale proceeds plus $1.5 million in his investments) was 3.5–4%, not 6–7%.
- There was a 50% chance that either Carl or his wife could live to be 98 and a 25% chance that one would live to be 104.
At this point, Larry presented the following options to Carl:
Option 1: Carl could exit today if he substantially reduced his post-exit income goal.
Response: Carl was not willing to reduce his lifestyle. That’s usually the case unless an owner is burned out or has serious health issues.
Option 2: Carl could initiate several strategies to grow business value, thus narrowing his gap.
Response: Carl was interested and understood that these strategies would take substantial effort and time. And, like most owners, Carl was interested in growing business value.
Option 3: Carl could retain the business indefinitely and invest the excess cash flow from the company for the next 10–12 years.
Response: Carl wasn’t willing to wait at least another decade before being able to exit on his terms.
Carl concluded, as most owners do, that exiting his business on his terms would require planning, action, and time—a lot of time. Larry helped him to calculate that it would take at least seven years to close the gap between where Carl was today and where he wanted to be.
Larry had eliminated Carl’s misperceptions by using facts and data provided by experts. He helped Carl exit the “reality distortion field” that so many owners inhabit. Larry brought Carl into the world of realistic business values, appropriate withdrawal rates from investment assets, and likely taxes and expenses of sale. Once Carl understood his true situation, he was ready and eager to act.
Benefits to Owners of Smashing Misperceptions
- Once owners understand the facts about the resources they have and the resources they’ll need, they can judge whether they can exit their businesses on their terms or not.
Benefits to Advisors of Smashing Misperceptions
- Using experts to obtain an accurate determination of an owner’s resources is instrumental in creating successful Exit Plans. If based on inaccurate information, the likelihood of plan failure is high.
- When advisors present owners with the facts about the value of their companies and the financial resources they’ll need to live the post-exit lives they desire, all but the most stubborn owners engage in the Exit Planning Process.
- Beginning the Exit Planning Process by setting SMART goals—and combining those goals with fact-based determinations of existing resources and resources needed—positions the Exit Planning Advisor at the head of the planning table.
- Most owners justify their reluctance to engage in Exit Planning based on mistaken assumptions about their resources.
- Accurate data about current and future assets are the best tools to overcome owner misperceptions.
- Unless Exit Planning is based on accurate estimates, advisors waste time building plans without solid foundations, and owners are unlikely to achieve their goals.