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Business exit planning is often around transferring ownership of a business.  In my experience the owner is often not interested in transferring their business or not able to transfer it for financial reasons.  If they’re not interested in transferring their business they often are interested in changing their relationship to the business.

Changing the owner’s relationship to the business usually means working less hours and being less involved in the day-to-day operations.  If we do our jobs properly, a well run private business can stay private for a very long time.  When this happens, the need for extreme financial planning is reduced and the owner’s safety for retirement income increases.

When we talk with private business owners we find they often feel their business is the least risky asset they own.  And, in many instances they are totally correct in this assumption.  A 55-year owner has typically been in their industry for 20 to 30 years and understands the ins and outs of their industry better than any other investment they may own.  In addition, after making mistakes for twenty or thirty years, the owner has usually figured out what makes their company tick.

What the owner may not understand is how profits and cash flow are related.  They also probably have not figure out what the key performance indicators are in their company and how they are related to drivers that make their company successful.

If we as advisors can help our business owner Clients understand how KPI’s integrate with cash, we can often give them another option when it comes to leaving their business.  Instead of having the standard answers of selling to an outsider, transferring the business to managers or children or liquidation we have another option.  This fifth option is moving to a passive ownership regime.

Passive ownership means that our owner must change their relationship to their business.  Having an understanding of cash flow and key performance indicators is the first step in this journey.

How many of your Clients are interested in passive ownership?  Do you even talk with them about this option?

Josh Patrick

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Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

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Topics: business exit planning, for advisors, Valuation, Key Performance Indicators (KPI), succession planning

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