If you're a business owner, your days are generally consumed with giving your enterprise its best chance at success: from identifying and capitalizing on growth opportunities to wrangling challenges and threats of all sizes.
What usually falls off the radar? Planning for the future.
More specifically, developing a financial plan that provides a framework for what you'd like to achieve in your life—and illuminates how the ultimate sale of your business can help you get there.
Consider the founder of a contracting business who wanted to sell out to the company's key employees, a group that included his son. Mike Benedict, head of BOK Financial® business transition services group, said that when many of the key employees discovered they would still be working with the son, they left the company, and the son eventually left as well. Absent the critical personnel, the company's value plummeted, and the owner received a fraction of its previous value upon the sale.
Yet, because the owner had developed a financial plan years earlier and stuck to it, he had enough assets outside of the business to shrug off the resulting lower sale price, Benedict said.
Similarly, when another of Benedict's clients who had been saving for years decided to sell his business valued at $3 million to his two daughters, his personal finances allowed him to creatively structure the deal. Thanks to his plan-driven foresight, he knew he only needed to extract $1 million to fund the retirement he envisioned, so a strategy involving seller-financed notes and gifted shares made everybody happy.
"I can do the best job in the world of getting a business ready to go to market and sell it at a very fair price for that business, but if that's not enough to allow the seller to be financially independent after the deal, then that's a disaster," Benedict said.
“They won't get another chance to sell the business again.”- Mike Benedict, head of BOK Financial business transition services group
Foundational questions set the tone
Many see the planning process as a series of tactics, but much like a company's strategy is built on thoughtful insights, a business owner's financial plan is constructed around his or her goals and ambitions.
Agnes Ryan, market executive with BOK Financial Private Wealth, fleshes out such considerations in conversations with owners that delve into family priorities, philanthropic thinking and perspectives on a desired legacy. She also explores the owner's preferences for the business' future, including whether he or she wants to:
- Pass ownership to family members
- Sell to employees or a third party
- Stay involved in the business following the sale
"We always ask 'what keeps you up at night?' and we frequently hear fears of not providing for a spouse or paying for kids' education if they pass away, as well as not being able to live the life they thought they'd be able to live in retirement," Ryan said. "Without planning, the business owner doesn't know what they need, and if they haven't done it, they might find themselves stuck."
Ultimately, the planning process explores the costs associated with the owner's personal goals and leads to a target number.
"If the number is way more than the business is ever going to provide, then expectations need to be reset," said Kimberly Bridges, director of financial planning at BOK Financial.
Benedict calls the disconnect between the target number and the likely after-tax sales proceeds from a business sale the "wealth gap," which, if it's too large, can result in delaying the company's sale. Alternatively, if a plan is put in place far in advance of an expected exit, an owner can plot out a more gradual payoff, he added, using measures such as stock sales or a deferred compensation plan.
In addition, Bridges said that the long-range approach also allows business owners, who frequently have nearly all of their assets tied up in the business, to diversify their personal finances.
"When your balance sheet is that concentrated, your risk exposure is amplified because if something happens to you or the business, it can impact not only the current business and household cash flows, but potential future cash flows if the value of the business declines," she said. "Premature death or disability presents a real risk if you don't have the proper protections in place.
"If you never create a plan, you may never see that risk exposure."
Overcoming inertia invaluable
While a financial plan may be on your long to-do list, it's possible you're waiting for the optimal moment to tackle it. That's fair, especially considering that you'll need to invest time and energy in thinking through your goals plus developing and revising the plan. And it could have some expenses related to the legal, tax and accounting expertise a comprehensive plan will require.
But, given the variables and unknowns that abound in your professional and personal life, meeting with a team of professionals and putting together such a plan sooner rather than later should rank fairly high on your priority list.
"Of course, it depends on the person, but during the pandemic, we saw a lot more concern in the moment—people were made more aware by what they were going through," Ryan said. "Simply put, there are those moments where we have no control and we want to have a plan in place."
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