Selling your business is a landmark event, often accompanied by emotions ranging from sheer joy to deep regret. Proper planning can help ensure this is a time to be celebrated—years of hard work have paid off!—by alleviating the stress and anxiety related to your exit.
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Here are some best practices that all entrepreneurs should put into effect as they approach their business exit and plan for the future ahead.
Develop a personal financial plan
Take a step back to analyze your current situation and chart your course to move forward.
Once the liquidity event is complete, your personal financial plan should be updated to reflect the actual numbers of the deal, giving you a good understanding of the size of the retirement nest egg available to deploy.
Our team defines this exercise as calculating your “Family Index Number,” which boils down to determining the annual rate of return required by your portfolio to adequately fund your future living expenses during retirement. The result will give insight into the optimal structure of your investments.
The planning process can also uncover an important decision point when an individual’s required portfolio return is not congruent with their risk tolerance. For instance, if a Family Index Number of 10% is required and the individual has a very low appetite for risk exposure, something has to budge.
Identifying the alternative solutions to bridge this gap are one of the inherent benefits of completing a Personal Financial Plan.
Carefully plan your next venture
Many entrepreneurs have a "lightning strikes twice" mentality; they want to dive into their next endeavor before the ink is dry on their previous business exit agreement. Unfortunately, they tend to believe once they have one successful exit under their belt it can be easily replicated.
However, this second venture rarely measures up to the first and often times can result in complete failure. This troublesome mindset underscores the importance of formulating a financial plan before you finalize your exit.
For "serial entrepreneurs" aspiring to launch a second business, proceeds resulting from the first liquidity event should be divided into two buckets — the retirement nest egg bucket and the risk bucket. The risk bucket may range from 10% to 50% depending on the size of the liquidity event and the individual’s lifestyle desires and is the total amount of money available to be reinvested into a new venture. This should include both startup costs and any ongoing contributions to support the new venture.
This is key information that a good wealth manager will use to maximize the probability of achieving success – which in this case is defined as enabling you to do all that's important to you while ensuring that work remains optional.
One final parting thought: don't overindulge and make sure to understand the limitations of the Personal Financial Plan. We've witnessed numerous entrepreneurs strike it rich with sizable liquidity events, only to splurge on new mansions, luxury cars, and yachts. If those purchases weren't factored into the original design, they have the potential to cripple what was once a well-constructed plan.
Selling your business is an exciting move toward your future. Proper planning ensures a comfortable retirement, reaping the benefits of years of success.
Mark Tepper, CFP, is president and founder of Strategic Wealth Partners in Seven Hills, OH, a comprehensive wealth management firm that specializes in planning for small business owners. Tepper has conducted extensive research with entrepreneurs, particularly examining the challenges they face in planning their exit and personal finances. For more information, please visit: www.swp-ohio.com