I was recently at a conference where after I told people what I did they kept referring my work to business succession planning. I kept correcting them to say that I did business exit planning as part of my work.
A topic I see written about on a regular basis is the ongoing discussion about separating your personal life from your business life. For years I tried to do this and about fifteen years ago I gave up and have been much happier since.
I’ve recently been doing some work on determining financial value for financial planning/investment management firms. These are the firms who develop significant cash flow based on a percentage of assets under management.
One of the firms we are working with is being courted by a consolidator who is rolling up investment management firms. They are paying ten times free cash flow on closing and fourteen times free cash flow in the future based on certain performance metrics being met.
When I talk about tax cost I mean the amount of money that must be earned before principal can be paid. For example, if you are in the 40% tax bracket you will have to earn $1,800,000 – pay $800,000 in taxes to be left with the $1,000,000 to pay someone for their stock.
Many of the business owners we work with are not able to financially leave their business. Often this is because they haven’t found a way to diversify their investments.
When I hear other financial advisors talk about business owner diversification I hear them speak about safety. The safety that many advisors are talking about is the risk of having all your eggs in one basket. (Your business)
I’m often asked about exit strategies for private business owners. I’ve only been able to come up with four basic ways for an exit from a business. In each of these there are sub-sets but for most these are the ways you can or for that matter will leave your business. That is of course as long as you leave before you die.
Some advisors believe that you should start your business exit planning at the same time you start your business. I'm not of that belief, but do believe that you should start planning for your exit when your business shows solid cash flow and you've turned fifty years old.
A stay bonus is a payment that key managers receive if a triggering event such as death or disability of the business owner or sale of the business happens. The purpose is to make sure key people stay with the business during a crucial time.
What they are really asking is what’s going to happen to me if you decide to sell the business, become disabled and are not able to work, or die.
I believe one of the best protection strategies you can put in place for your business and your family is the stay bonus. This bonus will pay a certain amount of cash to the key people in your company if one of the triggering events above happens.