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Over the years we’ve found that the most effective way to describe the goal-setting process to owners is to separate exit goals into three categories.

  1. Foundational:  What must you attain before exiting or losing control of the business?
  2. Universal:  What do you (and almost all other owners) wantto achieve upon exiting?
  3. Aspirational:  What aspirationsdo you have for yourself and your business as, and after, you exit?

This article describes the one goal–the foundational goal–that must be attained if an owner is to exit successfully:  financial independence.

 

The Foundational Goal:  Financial Independence

The acid test for every Exit Plan–regardless of which exit path an owner chooses–is financial independence for the owner no later than the date on which the owner transfers control of his or her company.  Only those owners who achieve financial independence when they leave their companies can be said to have successfully exited their businesses.

If you doubt the absolute importance of financial independence, ask your client-owner three questions:

  1. Are you willing to exit the business, transfer ownership and control without assurance of financial independence?  (If the owner’s answer is that financial independence is a condition precedent1to exiting the business, then having it is not just a goal:  it is a requirement of exiting.)
  2. What amount of annual income (pre-tax) do you need post-exit?
  3. Is it equally critical that your family receive this level of income if you die before your planned exit date?

Financial Needs vs. Financial Wishes

You must be careful to distinguish between how much money (as expressed as an annual income amount) the owner needs upon exiting from how much income the owner wishes or wants.  Financial need is a prerequisite of exiting.

Seldom is an owner’s financial need subject to downward adjustment but owners’ wishes regarding the amount of financial resources they want are always subject to revision.

 

Setting the Foundational Goal

How do owners determine how much income they need as and after they exit?  As you work with owners to fix this number, we suggest that you be precise, accurate and realistic.

Be Precise.  In many facets of Exit Planning, absolute precision is not necessary because it’s possible to make adjustments as circumstances change.  Determining the financial independence goals is not one of those areas.  Only owners with critical health issues, total burnout or doing business in a rapidly dying business niche (think Blockbuster video stores, book stores, instant print shops) should consider leaving before they attain their financial independence goal.

Be Accurate.  Determining how much income an owner and his or her spouse will need for the rest of their lives is not based on what they think they will need, but rather on what the planning process determines they will need.

Be Realistic.  Research shows that retirees continue to spend 70 to 85 percent of their pre-retirement spending, and some experts recommend that Boomers aim “for a 100 percent replacement rate instead.”2  These experts point to the costly activities that Boomers are undertaking during retirement and the cost of health care.

The experience of many Exit Planners reflects that research.  Successful owners generally do not decrease their spending, especially in the first years of retirement.  In fact, they often add second homes, world travel and new business start-ups to their existing expenses.  The cost of health care is impossible to foresee but not impossible to anticipate and plan for how long the owner and spouse might live.  As we age, it is fair to anticipate that health care and related expenses will be significant.

Attaining financial independence is a prerequisite of a successful exit, yet we find that many advisors leave it up to the owner to figure out how much income they will need after they exit their business.  Usually, this is a mistake.  

Determining Need

Most owners do not have the capability to determine their lifetime financial independence needs and most advisors do not have the training, experience or desire to help owners determine, precisely, accurately and realistically their financial independence need.

Well, that’s a real problem.  The solution, however, is simple:  Encourage owners to engage an experienced financial planner to help them.

A financial planner can ascertain:

  • The owner’s financial independence needs.
  • The likely income the owner’s non-business investments (projected to exist at the owner’s exit date) can generate, and
  • The rate at which the owner will use investment assets post-exit.

 

If you are not a financial planner, you are probably thinking, “So, what’s my role here?”

Your primary role is to show an owner why establishing financial goals that are precise, accurate and realistic is critically important.  Your next job (as an advisor skilled in Exit Planning) is one you will perform throughout the Exit Planning process; namely to bring the right advisor to the owner’s planning table at the right time.  In the case of setting financial goals, that means helping your client engage a financial planner who has experience working with entrepreneurs.

 

Ready, Fire, Aim

In this aspect of Exit Planning, your role may seem rather insignificant, but it is not.  You are making certain that your clients don’t do what entrepreneurs are so good at doing; taking action without sufficient forethought.  You are ensuring that every future Exit Planning action leads to an owner’s financial independence.  If you don’t encourage and direct your owner-client to set a realistic, accurate and precise financial goal, no one else will and it just won’t happen.

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