The first question most owners wrestle with when they think about the future transition of their businesses to successors is: How much will your company be worth in a business transition?
- How much is the business worth and how do I figure that out?
- How much will my business be worth if I sell at the right time? How much at the wrong time?
- How much do I need from the transition of equity to achieve my financial goals?
- How much do I deserve from the transition in return for a lifetime of financial and emotional investments?
- I want my child / children / key employees to take over for me, but how much can they realistically pay?
There are so many moving parts to the question of How Much that, individually or collectively, they can overwhelm and discourage owners. Unfortunately, when that happens, owners lose precious time that they could use to plan, give themselves options and greatly improve the odds of a successful transition.
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The Problem with How Much
The problem with the question of How Much is that it’s pushy. How Much typically elbows its way to the head of the line of questions when it belongs near the end. We recommend that owners take the six transition-related questions—ones we call The Big 6™— in this order:
- Why?
- What?
- Who?
- When?
- How Much?
- How?
How Much Is Not The Backbone of a Transition.
The first question we suggest owners ask themselves is Why: Why do you want to transition your business? Or, in other words, what do you want the transition to accomplish for you, your family, your successor, your business and your community?
Personal questions that relate to your Why might include:
- Do you yearn for freedom from the demands of working?
- What dreams do you want to pursue?
- Would you like to start another career?
- Do you want more free time to be involved in community activities or spend time with family?
- Do you want to secure the legacy of your business and ensure its future success?
- Do you want to secure the careers and financial future of your team?
- Are you ready for the next stage of your personal journey–your next big adventure?
Once owners set their own objectives, we suggest that they ask their spouses to tell them about their life-after-business objectives. During these discussions couples typically find that they share many—but not all—goals, and owners add objectives to their lists and/or adjust the dates by which they plan to achieve them.
How Much is an Important Question.
First, we want to assure you that the question of How Much, while not first, is important. We absolutely believe owners should reap a fair financial return on a lifetime of work, and we work hard to make sure they get it. We also believe that owners deserve a life-after-business that is as fulfilling and purposeful as their business career. To us, nothing is more rewarding than seeing owners living the next adventure of their dreams.
The Price of Your Next Adventure™
Some objectives—like wanting great relationships with your children and grandchildren— are emotional, and many emotional objectives come with a price tag. To some owners building great relationships might mean taking the entire family on annual trips to the Loire Valley. Other owners might build relationships by inviting everyone to a second home in the mountains, by a beach, or on a lake. All of these require cash. If one of your objectives is to fulfill a promise to spouse to construct a workshop soon as you retire, cash again.
Most business owners have worked with financial advisors to estimate growth in the value of their non-business financial assets. That’s a great first step, yet we suggest that the question of How Much include:
- Estimating the cost of your Next Adventure; and
- Understanding how much you need to, want to, or can harvest from the transition of your business.
A quick note: Not all owners need the proceeds from the transition of their businesses to support their Next Adventure, and not all need piles and piles of additional cash. If you don’t know which group you’re in because you haven’t calculated the price of your Next Adventure, you are not alone.
Part I: The Future Wealth Projection™
One of the tools we use as transition strategists, The Future Wealth Projection, builds upon a typical financial plan by including 1) an estimate of the funds it will take to achieve objectives as well as 2) what you think your company is worth.
The purpose of this exercise is to establish a financial benchmark for where you stand today, put a price tag on each of your objectives and determine how many years it will take before you have the financial resources to support your objectives.
We’ve found that putting a sticker price on objectives energizes owners because when they know their How Much, they go get it.
Part II: The Wealth Development Worksheet™
Using our second tool, the Wealth Development Worksheet, we build a model based on projections of annual revenue, cost of goods sold, operating expenses, net profit, estimated value of the business and timing and payment for equity transfers. This model provides insights into:
- How much excess cash flow the business can produce.
- How much the business could be worth at various points along the owner’s desired timeline for the transfer of equity.
- How much income an owner can expect to harvest from a combination of income streams: salary, distributions (based on the percentage of equity owned), consulting agreements and eventual sale proceeds.
- Whether the company can remain profitable while the value that the owner and successor agree on is taken out of the business.
The “Softer Side” of How Much
To this point, we’ve talked exclusively about numbers. Important numbers, yes, but behind the numbers are the people: their values, beliefs and, most importantly, relationships.
Raymond and his wife, Monica, owned a successful business and had three children. Only their son, Sam, worked in the business.
The couple agreed that 1) only children active in the business (Sam) should have ownership, and 2) they’d treat their other two children fairly through their estate plan. Things got interesting when we asked about their other transition objectives: Raymond wanted to buy a second home and was already looking. Monica liked the idea but was sure they didn’t have enough money.
We assembled the couple’s “advisor cabinet” (their financial advisor and CPA) and invited a valuation specialist. With input from both the financial advisor and valuation specialist, we completed The Future Wealth Projection and Wealth Development Worksheet and outlined several scenarios in which the couple could transfer equity to their son over time.
The insights we gained from the numbers were powerful: Raymond and Monica would have enough money to buy a second home immediately and still reach their other objectives.
The insight we gained when we talked to Sam was equally powerful: If his parents didn’t begin to transition the business to him soon and do so at a price that both recognized his contribution to the company and allowed the company to remain profitable, he would set up his own company and compete with his parents.
We’ve seen this reaction from successors before. The rising generation had put in years of effort and had modernized many of the company’s systems and processes. The transitioning generation had built the company’s brand and the connections that the rising generation was using.
In the process of creating a Transition Roadmap for this family, we identified the objectives of everyone involved and met the most important ones. In the end, the owners and successors moved on to their Next Adventures and the company was positioned for continued success.
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If you’d like to know more about our Transition Roadmap Developer Process and how we help owners organize, prioritize and reach their goals, give us a call.
