This post originally appeared in Kentlands Psychotherapy’s blog, written, by TODAY’ S GUEST BLOGGER Dr. Elizabeth Carr, for their monthly advice column The Laudable Life which appears in print in the Lakelands Leader.

Have you ever heard the old saying, “What you don’t know won’t hurt you”?  Not sure why, or who it was in my life at the time would say it, but I remember hearing it a lot when I was a kid.  Through the years I’ve found this saying, through personal experience and observation, severely misleading at best.  I wonder if the person who originated the phrase had only “current hurt” in mind. 

In 1975, Gary Dahl created the perfect pet - the Pet Rock.  In six short months, he sold 1 million Pet Rocks, then the fad died.  You see, the Pet Rock did not really solve a customer’s problem – it was just a cute idea.  On the other hand, the over-the-counter pain killer market exceeds $ 50 billion annually.  The point is people will pay to remove or alleviate pain from their lives, while “Pet Rock” sales fade away. 

As business owners, we want to serve clients well, generate incomes for ourselves and our employees and hopefully build a company that has real value when we decide to leave.

We refer to it in the exit planning trade as the "perpetual five-year exit plan".  When asking a business owner when they plan to exit their business, the following is a fairly common response:  "Not sure but probably about five years from now..."  And it’s not unusual to get the same response year after year from the same owner.  There can be numerous and varied reasons for the response, but a lack of planning is often primary. 

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

Fidelity Investments is an international brand and one of the most valuable privately held businesses in the world. 

Founded in 1946, Fidelity Investments celebrated 75 years of business in 2021.  Through their 52,000-plus associates and global presence, they serve 40 million individual investors, manage employee benefit programs for nearly 23,000 businesses, and support more than 3,600 advisory firms with investment and technology solutions.  Since its inception, Fidelity has experienced consistent and impressive growth.

Several years ago, I did a cross-country trip with my family.  We laid out a rough plan of what we wanted to see, how long it’d take to get from Point A to B to C, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rear-view mirror, with an occasional glance at the gas gauge and the road signs, but looked ahead and tweaked the plan.   Yet, that is often how business owners run their businesses;   this year’s plan can often be “let’s do what we did last year – just more of it.”  We look at whether we have cash in the bank and check our financial statements from last month and compare how we are doing against last year.

Should I engage a business broker or M&A professional to sell my business, or should I go at it alone?

Our firm is agnostic as to how a business owner exits their business.  The mission is designing and implementing a plan for the exit route (sale to a third party, sale to insiders, transfer to children, ESOP, absentee owner) that will give the owner the best opportunity to attain all their goals (financial, values-based, legacy).  That’s a key value-add when engaging our firm.

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

• makes a substantial business contribution

• possesses critical information or knowledge or

• maintains and nourishes key contacts and relationships

A critical and foundational element of your successful exit plan will be the calculation of any gap you might have in the value of your current assets (business and personal) and how much money you will need when you leave the business. This is your financial gap analysis.

Deciding on an exit route of a sale to insiders or children can be more complicated and less expedient than a sale to a third party. There are not a few key planning issues when considering this exit option SUCH AS:

• Will the owner’s financial goals be achieved?

• Is the business cash flow strong enough to support a transaction?

• How can the transaction be structured to minimize taxes?

Probate is the legal process through which property is transferred after a property owner’s death. Generally, the probate process requires the gathering of all assets, paying off debts, and distributing the remaining assets in accordance with the deceased person’s estate plan and the law. The probate process is facilitated by a court-approved, or appointed, a person known as the administrator, executor, or personal representative of the estate.

Key employees are “key” because they have a significant impact on the current and long-term success of the business. Hence, the business owner(s) will want to be intentional and strategic in aligning compensation and incentive plans for those key employees with the owner’s goals for business growth and exit. Owners should also protect against the potential loss of these valued employees due to death or disability, as their loss can be quite damaging and even destructive to business value and future growth. Following are suggested steps to take in assigning value to your key employees.

This internal sale method works best for most owners who have the following goals:

• Transfer their business to key employees

• Motivate and retain key employees

• Receive full value for their business

Let’s look at a short case study regarding the concept of Modified Buyouts.

You might think that transferring your business to a child or family member would be the easiest exit route to facilitate. Whereas statistics reveal that only one-third of all family businesses pass successfully to the next generation, and only 10% to the third generation.

Owners considering a transfer to children often run into these obstacles, among others…

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” being the unexpected events of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real life events…

Minimizing taxes, based on our experience, seems to be a “core value” shared by most, if not all, business owners. And, seldom are they more cognizant of potential tax burdens than when transacting a sale of their business. Many owners are also characterized by generosity toward others through charitable giving.

At the heart of an effective and successful plan for a business owner's exit is what we call transferable or sellable value. The transferable value being the value of your business apart from you the owner or what someone is willing to pay for the business without you.  

Following are a few sample questions for gauging the strength of your business transferable value

“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor.  We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything.  We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business into your overall plan for managing your wealth.