One of the first and most important steps in preparing for an eventual exit from your business is determining how much money you will need to accomplish your goals for the rest of your life after the business.
We call this a Personal Financial Gap Analysis.
At its simplest, the analysis compares the financial resources you expect to have available at exit with the resources you will need to fund the life you envision afterward. If there is a gap, you need time and a plan to close it.
The problem is that too many business owners base this important calculation on a "back-of-the-envelope" estimate of what their business is worth.
That's not much of a foundation for meaningful planning.
For many owners, the business is the largest asset in their investment portfolio. If the value assigned to that asset is substantially overstated, the entire financial analysis can provide a false sense of security. Meaningful planning requires accurate data—or at least data that is reasonably supportable.
Consider Tom and Jane.
They had $500,000 in retirement and brokerage accounts, $1 million of personal real estate, and business real estate valued at another $500,000. That gave them $2 million in assets before considering the value of Tom's business.
Tom's financial planner, Sarah, was preparing a retirement needs analysis and asked Tom for an estimate of the value of his company.
Tom gave her a "rough guess" of $4 million.
Suddenly, Tom and Jane appeared to have $6 million in assets. Based on that number, Sarah's analysis showed that they had no financial gap. Tom and Jane were understandably pleased. It appeared they had accumulated enough wealth to accomplish their post-exit goals.
But there was a significant problem.
No one had determined whether the business was actually worth $4 million.
Several years later, when Tom was ready to sell, prospective buyers took a much closer look at the company. Their due diligence revealed several weaknesses: the business was still too dependent on Tom, profitability was below expectations, the management team was underdeveloped, and important operating systems were lacking.
Instead of $4 million, the best offer was $2.5 million.
And even that number wasn't all cash at closing. A portion of the purchase price depended on a three-year earnout, requiring Tom to remain with the company and achieve certain performance objectives before receiving all of the consideration.
Tom thought he was financially ready to exit. He also thought he would be free to leave the business.
He was neither.
The problem wasn't simply that the business was worth less than Tom expected. The larger problem was that Tom and Jane had spent years making important financial and life decisions based on a number that had never been validated.
Imagine how different those years could have been if Tom had obtained an objective Estimate of Business Value earlier.
He could have identified the gap between what the business was worth and what it needed to be worth. He could have strengthened the management team, improved profitability, developed better systems, reduced the company's dependence on him, and worked intentionally to increase transferable value.
Or Tom and Jane might have decided to adjust their post-exit goals, save more outside the business, work a few years longer, or consider a different exit route.
None of those choices is necessarily right or wrong.
The important point is that they would have had choices.
That's one of the primary reasons to begin exit planning well before you're ready to exit. Good planning isn't about predicting exactly what your business will sell for years from now. Markets change. Businesses change. Buyers value companies differently.
It's about developing a realistic understanding of where you are today, where you want to go, and what needs to happen between the two.
An accurate Estimate of Business Value, combined with a thoughtful Personal Financial Gap Analysis, gives you that starting point.
And the sooner you know whether a gap exists, the more time you have to do something about it.
That's not simply exit planning.
That's ExitReadiness®.
