Welcome to The Charleston Entrepreneur Podcast where you go behind the scenes with financial planner and business exit planner Brett Fellows to hear stories of how leading Charleston entrepreneurs navigate the inevitable challenges that arise on the path to financial freedom and get insights from real business owners about how to break through to the next level in their business. And now here’s your host, Brett Fellows.
BRETT: Welcome to The Charleston Entrepreneur Podcast. BRETT: My radical idea is that personal finance should be…personal.
BRETT: Ultimately, the human element in each of us is what makes up personal finance. We are all business owners doing the best we can to make the right decisions about our personal lives with the information we have.
BRETT: In this podcast it is my goal to give you everything I have to make you successful. I want you to live your most fulfilled life, and I know you can. BRETT: In the last episode, I talked about the different Exit Paths that are available for entrepreneurs in Charleston, SC.
BRETT: Because the one thing I do know about all of you is that you are going to leave your business someday, eventually, in the future.
BRETT: So I thought what better title for today’s episode: Leaving Your Business is Inevitable.
BRETT: As business owners, we tend to start to think about leaving our business, or more formally referred to as our Exit Planning Process, when two streams of thought converge on us.
BRETT: And I’ve found the first stream is a feeling that business owners have, in that they want to do something different besides just going to work every day.
BRETT: They may find themselves wanting to be somewhere else -doing something else- or they simply no longer find enjoyment, doing what they’re doing.
BRETT: The other stream is more an awareness than a feeling.
BRETT: And that awareness is about their Financial Independence. They’re either close to or making really good strides to reaching financial independence (whatever that means to them) and they believe they can achieve financial independence today…selling their business will through them over the finish line.
BRETT: When these two streams meet; when entrepreneurs both feel a need to do something different and are aware that a sale of the business would achieve this goal…any business owner’s thoughts will inevitably flow toward exiting their business. It’s only natural.
BRETT: So if these two streams converged for you, will your business be prepared for your departure, on your terms?
The risks of not designing and implementing an exit strategy
BRETT: In 2015 we had a prospective business owner client tell us that she wanted to leave her business in five years…that was her goal, and she wanted to sell it for enough cash to maintain her existing lifestyle.
BRETT: A business valuation was done and with a current annual cash flow of $1 million before the owner’s salary, her company was worth around say $4 million.
BRETT: When we suggested that she create and implement a step-by-step process that would continue increasing the company’s value, minimize taxes, protect her existing value from loss, and assure that her two key employees stay with the company after her exit…the client completely agreed.
BRETT: But then like many, unfortunately, she did nothing more. She did not design nor implement any type of Exit Plan.
BRETT: Fast forward five years, to last spring of 2020, COVID-19 happened and significantly impacted her businesses’ cash flow. She had reduced overhead but had done nothing to increase cash flow over the years.
BRETT: She had no business systems (especially any marketing plan), nor restructured her inadequate and under-motivated management team.
BRETT: So in 2020, she still was at least five years away from her exit. No different than she was in 2015.
BRETT: So leaving your business is more than just thinking and talking.
BRETT: It’s taking actions that are necessary to enable you to reach your Exit Objectives.
BRETT: Like I talked about in last week’s episode, these objectives include leaving your business when you want, to the person you choose, for the amount of cash you desire.
BRETT: And exit planning takes a lot of time. The farther in advance you start planning for your exit, the more options you have and the better the outcome is likely to be.
BRETT: Now, the Exit Planning process I’m going to talk about today is by no means nothing new.
BRETT: And although each Exit Plan is unique to the owner who creates it, there are some signature characteristics we can all rely on.
The signature characteristics of an effective exit plan
BRETT: First off, every Exit Plan aims to increase business value both in the short and long term. The stronger its value, the more business is worth…right?
BRETT: Another characteristic; successful (notice I emphasized that word) Exit Plans are put into writing (notice I emphasized that word) so that everyone involved can measure their progress against the owner’s goal.
BRETT: And lastly, good Exit Plans incorporate accountability by holding the business owner and each of their trusted advisors (like attorneys, accountants) to deadlines for completing each task.
The seven steps of exit planning
BRETT: There are Seven Steps to an Exit Plan and today I’ll go through each of them really quickly.
BRETT: Step One: Have you determined your primary exit objectives in leaving the business?
BRETT: Like your desired departure date? The income you need to achieve financial independence? The person to whom you want to leave the business?
BRETT: And do you have secondary objectives like taking care of certain employees or continuing the family legacy?
BRETT: Step Two: Do you know how much your business is worth? Do you know what the business’ cash flow is likely to be while and after you leave it? Do you know the amount of income you can expect to receive from your non-business investments?
BRETT: Step Three: Do you even know how to increase the value of your ownership interest? How do you protect the business value you’ve already created? What can you do to minimize income taxes not only today but also when you transfer ownership?
BRETT: Step Four: If selling to a Third Party, do you know how to in a way that will maximize your cash and minimize your risk and tax liability?
BRETT: Step Five: If you’re transferring to Insiders (which are co-owners, family members, or key employees), do you know how to do this without losing control of the business until you have all of your cash in your hands? Paying the lowest allowable amount in taxes?
BRETT: Step Six: Have you done what it takes to ensure that the business survives if you do not?
BRETT: And last, Step Seven: Have you provided for your family’s financial well-being and continuity should you die or become incapacitated both before and after your ownership transfer?
BRETT: As you hopefully can tell from that list, those seven steps are pretty heavy.
BRETT: I started following Tim Ferris and his podcast many years ago, it was the first podcast I had ever heard, and he is a big fan of the Stoics, specifically Seneca.
BRETT: One of Tim’s favorite Seneca quotes is appropriate to get us started, he said: “When a man does not know which harbor he is heading for, no wind is the right wind.”
BRETT: Seneca’s advice is still pretty sound today being centuries old.
BRETT: Yet the reality is, few of us as business owners heed this advice or appreciate its implicit warning.
Why many business owners fail to set their exit planning objectives
BRETT: The First Step in building a successful Exit Plan is to set our Exit Objectives, your goals. And many don’t do this, why?
BRETT: Why? Frankly because it’s too emotionally wrenching to contemplate separating ourselves from a business we have created, nurtured, lived with, suffered with, brought to maturity, something we have totally immersed ourselves with.
BRETT: It’s tough, and unfortunate. All the valuable experience we develop as owners and operators of our businesses, does not equip us to leave our businesses successfully.
BRETT: Experience, learning, and trial and error all require time. A luxury most of us as business owners don’t enjoy as we approach the end of our careers.
BRETT: All of this planning sounds complex and time consuming I know, but it does not have to be.
BRETT: You can create a written plan and comprehensive Exit Plan that gets you the money you need, achieves all of your other objectives in a time and cost-efficient manner.
BRETT: When you’re armed with a written Exit Plan, with a team of skilled and experience trusted advisors, and ideally with several years before your Exit, you can really capture an ability to leave your business in style.
BRETT: Thanks for tuning in today everybody. As always, visit our website oakcapitaladvisor.com for more information, and request a Free Retirement Assessment to get started on your retirement planning journey. And check out the show notes for more resources that can help you succeed. Until next time.
BRETT: Have a great day!
This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial or other professional services.