You’re planning on exiting your business. How do you go about doing that? Well, it starts with finding an advisor who’s experienced. You only get to leave your business one time. You don’t want to mess it up. Today, we’re going to talk about the critical questions that need to be asked when you’re planning your exit strategy so you can find the right advisor for your situation.
There are so many financial advisors out there, and not all of them are the same. If they were, we’d all be doing the same job in the same exact way, there’d be no deviation, we’d all be earning the same returns and using the same strategies. So when it comes to picking an advisor who’s right for you, it really comes down to a few critical questions that need to be asked.
The first question you need to ask is: does the advisor specialize in exit planning? Most advisors are only concerned about managing your assets. They want to provide investment advice on the assets that you’ve already accumulated. And it’s a totally different skill set for the exit strategy. It’s about making sure that the business is in a position where it’s able to be sold and sold for the highest price. Your blood, sweat, and tears went into this business for however many years building it so it could provide for you, your family, and your community. But when it’s time to step back, how do you make sure you’re able to recoup your investment for the most amount possible?
The key is preparing you for that ultimate day when you’re going to walk away from your business. Most business owners—80 to 90 percent—have their wealth tied up in their business. And when they leave the business, they are typically only getting 24 cents on the dollar for the value of their business. Clearly, something needs to change in that dynamic because you’re setting yourself up to be in a situation where you may not be able to get the most out of the value of the business from what you’ve done over the years.
It all comes down to proper planning. You only get to do this one time. You only get one shot in most cases, unless you’re a serial entrepreneur, to leave your business and to get the most out of it as possible. You want to have someone on your team who’s experienced with this type of situation and who’s able to help you navigate these waters.
We had a situation where a client of ours had been planning with us for 32 years for the exit he was hoping to have somewhere down the road. Thirty-two years ago, he had no idea what that would look like, but every year he put money away, and we prepared him for that exit. Over the past five years of his business career, he was getting offers to buy his business. And those offers were lowball offers. He was in a position where he could reject those offers because his financial wellbeing in retirement was never going to be predicated on selling the business.
It all comes down to having money. And when you have that money, you have options. When you don’t have money, you could be scrambling for it. You want to get out of the business, you want to retire, and there’s only one way to do it and that’s to take an offer that someone’s giving you. But when you have money, you’re able to negotiate better.
Being prepared really puts you in a position where you don’t have to jump at the first offer. And by the way, the offer he got was incredible. It was over 50 percent more than the best offer he had received previously. He had the patience to wait it out for the market to be just right. That put him and his family in a very good position financially for retirement.
The second question you should be asking is: can the advisor show you ways to improve your cash flow so that you can find additional money within your cash flow to direct toward the exit plan? Think about the dynamics of that. There’s money within your cash flow that might be being utilized inefficiently, and if we can redirect that cash flow to fund your exit plan, it doesn’t have to come out of your current expenses.
The first step is to have that awareness that, “Hey, I’m going to want to exit my business one day,” but that doesn’t necessarily solve the problem. Awareness of the problem isn’t going to give you the solution to the problem. In fact, it may impose another problem and that’s that you don’t have the money to fund the solution. That’s the case in most people’s situations. But having an advisor who is able to step back and look at your position from a different perspective, perhaps through the perspective of control and getting your money to do multiple duties so a dollar that was only performing one job is now able to do that job plus fund that succession or exit plan is going to be a good thing. You’re going to be able to achieve two goals with one dollar.
We had a situation where a client wanted to do his exit plan. He was 64 years old and hadn’t done any planning previously. When we told him that it was going to cost about $20,000 to $25,000 per month to set up this exit strategy, he said, “I can’t do that.” I told him, “I’ve already looked at your financials. You have over $20,000 of recurring revenue that is being utilized inefficiently. If I can show you those areas and prove to you that they’re being used inefficiently, would you put that money toward your exit plan?” He said absolutely. And that’s exactly what we did. We found about $22,000 per month of recurring revenue that was being used inefficiently. It was things like debt, inefficient planning, and taxes. We designed a plan to redirect that money to create his exit strategy, while still addressing all the issues that the money was previously being used for. The key is we were creative enough to find the money within their current cash flow to fund their exit strategy.
The answer isn’t always as simple as reducing overhead or increasing revenue. There are other ways to look for inefficiencies within a business’s cash flow that can be used to achieve a huge goal like an exit planning strategy.
The next question you should be asking your advisor is: what is their position on debt? Seventy percent of small businesses have some form of debt. Not being well-versed in debt strategies could really hinder your ability to set up an exit strategy. There’s good debt and bad debt. What we try to do is analyze your debt situation and maximize the efficiency of your debt service. That’s another way you can improve the efficiency of your money and your cash flow.
Most business owners don’t want the burden of debt on their shoulders, so they pay as much as possible and direct as much revenue and cash flow as possible toward that debt. But what that might be doing is actually holding you back. By putting all of your money in one bucket, you no longer have anything left to fund the things that really matter and the things that are leaving you exposed long term.
The next question you should be asking is: what is the advisor’s attitude on risk? Specifically, are they recommending strategies for your exit that increase the amount of risk you’re taking? I don’t know about you, but when I’m doing planning, I want a plan from A to B that’s going to work no matter what. Because otherwise, what’s the point of doing a plan? I don’t want to risk my way to a possible reward. I want to make sure that, especially with something as precious as a business, I’m able to achieve the goal I’m working so hard to reach.
We have found that there are a lot of advisors in the exit strategy space who recommend strategies that increase your risk. These strategies are often predicated on financing to set up your exit. If you’re taking on additional debt to fund your exit, that’s not always the best case scenario. Others are recommending products that pass risk back to you, and that’s not a good situation. We’ve seen those situations and called attention to them, whether it’s a strategy or a product or both, that are adding additional risk to your situation risk you may not even be aware you’re taking on.
It all comes down to awareness, knowing what you’re doing, and making sure your advisor is aware of what you want and how you want to achieve your goal of exiting the business. If you’d like to learn more about how to put these strategies to work for you and if we’re the right fit for your business exit strategy visit our website www.tier1capital.com and click the “Schedule Your Free Strategy Session” today. We’d be happy to chat with you about your specific situation.
Remember: It’s not how much money you make, it’s how much money you keep that really matters.