Business Planning and Personal Wealth: "If You Fail To Plan, You Are Planning To Fail"

Thomas M Dowling CFA, CFP®, CIMA® |

This is a quote by one of our founding fathers, Benjamin Franklin and it is still relevant today, especially if you own a business and would like to sell it one day. It is our experience that most entrepreneurs do not have a formal plan to ensure they maximize the value of their business. We also find that even business owners who have put plans in place, many do not consider how to maximize their post-sale personal wealth.

The end goal for many successful entrepreneurs is to be able to sell their business when they are ready for the next stage of their life.  Oftentimes, an entrepreneur's business is the bulk of their net worth.  Being able to sell it successfully, not only validates the owners life work, but also allows them to enjoy the fruits of their labor with a substantial influx of cash. The problem is that many of those entrepreneurs have spent their whole life building their business and a small fraction of time on creating a plan to exit that business. Entrepreneurs have a multitude of reasons to sell their business which can include wanting to start a new one, wanting a new challenge or they just want to slow down and retire. By not planning their exit strategy they are potentially leaving a lot of their hard-earned money on the table. Even those owners that have tried to be proactive may not be fully prepared to maximize the value of the sale. The result of this lack of planning is often less than expected wealth for the business owner and their families. This could wreak havoc on the owners Financial Plan. In our experience the most important step that gets overlooked is putting a formal transition plan in place for transferring ownership of a business. A formal plan is designed to structure the company (and its employees) for the firm’s eventual sale to new owners. Done well, a transition plan can maximize the sale price as well as the health and continuity of the company itself and its key employees.

A transition plan should have two components to it which are the Corporate Exit Planning side and the Personal Wealth Planning side. A strategy that includes both components may create a higher value and satisfaction for the owner and their family.

Corporate planning

Two main reasons that business owners fail to plan are lack of time and the feeling that now is not the right time to start preparing.  This is where not planning could be planning to fail. Without a plan these owners may ultimately sell for far less than what the business is worth or even worse unable to sell it at all.  It is important to think about your exit the same way you would building your business, which is in a thoughtful and systemic way. Often, business owners will say “I have it in my head”. That is not a plan. The transition plan should have steps and be concrete. Business owners who create transition plans are more prepared and focused. 

Some of the most common steps to take for the business are:

Update Financial statements

Establish proper financial processes and controls

Ensure that assets, intellectual property, and trademarks are protected.

Develop or increase recurring revenue

Address any outstanding issues that may stall a sale, especially tax related matters

Personal wealth planning

You may have put in place the process to maximize the sales value of your business, but the next step is to maximize the dollars that ultimately go into your pocket from the sale.  Some business owners are not putting in the steps before the business is sold to maximize the after-tax money they will receive. This could be a major misstep for the business owner and could result in unnecessarily leaving a lot of money on the table. Being proactive by planning in advance is crucial. It’s not at all uncommon for business owners who are weeks or even days away from a sale to start asking about estate and other taxes—at which point they generally are told that it’s too late in the process. It takes all the elements of corporate exit planning and includes a central focus on family wealth to achieve optimal results. You may have made all the right steps to maximize the sales price with corporate planning, but a lack of personal wealth planning exposes them to taxes that quickly eat into the sale proceeds. Therefore, they may still end up walking away with far less than they could.  Some, but not all, proactive steps to consider taking on the personal wealth side include:

Engaging in Retirement, Tax and Estate Planning and stress test those plans to see where issues may arise that could derail your plans.  

Transferring ownership out of an estate to children over several years, which if done properly can reduce estate taxes.

Use trusts to mitigate the impact of capital gains taxes or future estate taxes.

Getting the right people on the bus

As explained in the book “Good to Great”, you need to get the right people on the bus. In business they say ‘you are only as good as your employees’. Treat your exit planning team the same. Exiting a business can be complex and has many moving parts, therefore, you want skilled professionals who can help you maximize the final after-tax value. A key component to this team is the Financial Planner. A good Financial Professional can help you get the right people on the bus and coordinate the moving parts while integrating the sales proceeds with your personal financial plan. Oftentimes, business owners go from having much of their net worth tied up into an illiquid asset to having a large amount of liquidity. You want a plan for that so you can live the life you desire.

Additional team members would include but are also not limited to

An attorney

An accountant

A valuation expert (who may or may not be your accountant or attorney)

A corporate tax specialist (who may or may not be your accountant)

In conclusion

If you plan on selling your business at some point, even if it is not soon, then you may want to consider taking the time to lay down the foundation and consult with your professional advisors to create a transition plan. Doing this will help position you for the best opportunity to maximize your sales price and your post sale wealth.

Brokerage and investment advisory accounts, are offered through Alliance Global Partners, a member of FINRA and SIPC.  

The opinions expressed and material provided are for information purposes only and is not an offer, recommendation, or solicitation of any product, strategy, or transaction. Any views, strategies or products discussed may not be appropriate or suitable for all individuals and are subject to risks.  Prior to making any investment or financial decision, a person should seek advice from a financial, legal, tax and other professional that consider all the particular facts and circumstances of the person’s own situation.  Alliance Global Partners does not provide tax or legal advice.