For business owners focused on the day-to-day responsibilities of running a company, life without the company can be a distant concept. But if you don’t plan for it now, you may not be positioned to live life on your terms when you do step away.
“First, you have to be mentally prepared,” says Frank Fantozzi, CPA, MST, PFS, CDFA, AIF®, CEPA, president and founder of Planned Financial Services. “Will you walk away after a lifetime relationship with your business, or stay on in a less prominent role? Are you ready to give up the spotlight and the authority for life outside of your business?”
Smart Business spoke with Fantozzi about how to prepare to step away from your business and be well-positioned for the next phase of your life.
Why is it so important to plan ahead?
The psychological part is critical. You need to understand how you will spend your time, what gives your life purpose and meaning outside of your business, and the legacy you will leave. Working with an experienced independent adviser can help you identify your goals and create a path to help meet them.
For most owners, their net worth is closely tied to their best-performing asset, the business. Owners need to diversify wealth and risk outside of the business, which begins with understanding your cost of living without your business. While there may be perks and benefits that can be written off today, such as a company car, golf club membership or employer-based health insurance, once you leave, you may have to pay for these expenses yourself.
Begin by determining what the business needs to be worth when you sell. Have you accumulated enough assets to afford your desired lifestyle? If you need $20 million in investable assets to live the life you want, but you’ve only accumulated $6 million in non-business investments, your business has to sell for a net of $14 million to avoid a wealth gap. If you haven’t taken steps over the years to maximize business value and sell the business for $10 million, you won’t meet your goal. Focusing on your personal planning needs well in advance is necessary for determining how to optimize business value to meet your number.
What influences business value?
Primary influencers of sale value include EBITDA, human capital, social capital, structure capital, customer capital and a business that is not centralized around the owner. These characteristics improve your multiples.
However, if your business is not optimized, it could take years to improve these areas, so you don’t want to wait until you’re ready to leave — or worse, forced to leave due to an illness or other event. Determining your personal financial requirements now will help you understand when you can walk away on your terms, while ensuring there is no business profit and value gap, which can create a wealth gap in your personal plan.
What else is involved in stepping away?
It’s really about what I like to call “Life Take 2” and what you will need to financially support the next phase of your life. Everything needs to be funded, including your lifestyle, legacy, the charities you support, outside interests, long-term care preferences and whatever fulfills your ego.
Developing a thoughtful plan begins with understanding what your soul wants, what your family needs and the finances required to accomplish your desired outcomes. Everything doesn’t have to be crystallized right now, but the sooner you begin to identify your aspirations, the sooner you can start making decisions about how you will accomplish these goals.
I’m a firm believer that having time on your side allows you to make better decisions and adjustments along the way, as you get closer to your goals. Remember, you’re not striving for perfection but for progress. Move the needle forward, and you’re more likely to achieve what you want without any negative surprises.
Early preparation is key. You want the business to be in ideal shape before you get tired of it or ready to sell. That begins with a clear understanding of what you want for your life and the steps you can take now to get where you’re going. Sometimes selling at the business peak is when you’re at your peak. ●
INSIGHTS Wealth Management is brought to you by Planned Financial Services
