The Biggest Pile of Cash - A Rare Bird

Bruce Swabb, CPA

It has been said that the time to plan an exit strategy for your business is the day that you start the business. In this is the final chapter in our series of posts focused on developing exit strategies I’ll describe a very rare bird  – the business owner that recognizes a need to craft an exit strategy many years before the expected transition event. 

As business brokers, Dick and I want to sell your business -  duh!  But we also want to develop a long term relationship with you many years prior to selling your business.  We have much to offer in addition to our brokerage activities.  Such a working relationship ensures you’re emotionally ready, and most importantly that you will reap the financial reward you require after selling your business.

This post describes a long term thinker.  She runs a successful business generating a couple hundred thousand in surplus cash each year.  With kids entering college, it is time to start to focus on retirement. She expects to continue running the business for another fifteen years or so.  Boy, do we love to find these owners when they are 45 to 55 years old, as it opens up so many more planning opportunities!

With a 15-year time horizon, she can clarify and plan for several important needs: fund family education and daily lifestyle; ensure a comfortable retirement income stream; have a contingency in place in case of death or disability; develop a key person or team to operate the business, and have the business in strong condition and ready to sell when the time is right.  Sounds pretty good doesn’t it?

To achieve the feats in the previous paragraph, quite a few professional disciplines come into play, such as accounting, estate planning, insurance, taxation, personal financial planning and of course legal.  Attempting to create your own team by engaging each of those professionals separately would be no fun at all.  In fact, that is a big factor in why most business owners simply put this effort off until another day – which never arrives.

Let’s unpack that 15-year plan above and take a look at its parts.

Initial Vision and Endgame.  

If you were planning to sail a boat across the Atlantic to Gibralter, you would chart the course in advance, and likely plan a stop in Bermuda and the Azores along the route.  You would constantly check your course and position along the way to ensure you were heading toward your ultimate goal. Your course will be affected by outside forces, such as strong currents and heavy weather.  But as a competent navigator, you check your position every half hour and adjust course to ensure you are efficiently making progress to your target.

Deciding where you want to be after 15 years in business is no different.  You simply need to define what you want and lay out a general path to get there.  One thing is certain, without marking your ultimate target, you won’t end up there by accident or luck.  Write your end goal on a piece of scratch paper.  Think about it. Stew on it. Modify it. Don’t worry about getting it right the first time. Once your target is defined, the currents and tropical storms of daily business will certainly create course corrections each year, but the fact that you’ve defined a target will guide you in how to make those corrections.

Cashflow Management.

To achieve your vision, you must carefully allocate the free cash flow generated by your business toward three areas: 1) capital needs of the business; 2) current disposable income, and 3) a source of retirement income.  This “three-legged stool” will not support you if any one of the three financial needs are starved. Steady investment in all three areas are required to maintain balance and a solid foundation.

Contingency Planning

How will the business survive if you or your partner become disabled?  The short answer is always key man insurance and a buy/sell agreement – which we HIGHLY recommend.  But there is also the human resource side of the equation.  Somebody had better be ready to step into your shoes to keep production flowing and customers satisfied.  You must ensure there is sufficient cross training at all levels within the business – and that includes your position.

Succession planning

Every parent nurtures the idea that someday, their kids might take over the company.  For a number of reasons, it is very rare that children and family members actually WANT to, or have the skills needed to take over the business.  Realistically assess your situation and begin developing your successor.  It is more likely that there is a promising key employee that can be groomed to lead the company.  One important planning aspect will be to devise a way that this key person can finance the eventual purchase of the company.  Several ideas can be implemented to position the person to buy the company from you or your heirs.

Retirement Funds and Insurance

As mentioned in the Cashflow paragraph above, your plan will include regularly investing free cash flow for your eventual retirement.  There are so many vehicles available that you will need sound advice on which investments best fit your needs and risk profile.  The tax ramifications of each investment can create big differences in the final pile of cash you have to work with each year.

One vehicle that is often overlooked due to the mainstream focus on tax-deferred investments, is a good old fashioned equity based life insurance policy.  These can be owned in a number of different ways, but if carefully designed, such a policy can accumulate a very nice nest egg. And these policies can be used to provide a tax free stream of income while you are alive (much like an annuity, but most tax efficient) and still provide a death benefit to support your spouse after your death.  Such a policy can provide shelter from stock market volatility and can also be used as collateral for business borrowings.

Maintain Readiness to Sell

The greatest aspect of such thoughtful forward planning is that you are never precluded from selling your business at any time.  By keeping your business in a state of readiness for market, you can act decisively when a really good offer pops up.  With your ultimate goal still in focus, if a deal you can’t refuse presents itself, you will know that it is the right course of action.  Your business will attract a high market multiple and because you are ready for the due diligence process, the transaction will likely close fairly quickly.  How powerful is that?

Thousands, of business owners are being under served. They struggle, on their own, to solve their planning, investment and exit strategies without experienced guidance.  This results in very mediocre results when it becomes time to sell their businesses.

We’ve developed a team of professionals in one shop that have the experience to help you plan and ACHIEVE each of the long term goals noted above.  

Are you one of the rare birds? If you are a long term thinker and open to new ideas, we can do great things for you!

 

photo credit: <a href="http://www.flickr.com/photos/66239816@N08/27842651416">Colours of Africa</a> via <a href="http://photopin.com">photopin</a> <a href="https://creativecommons.org/licenses/by/2.0/">(license)</a>