As a business owner who is thinking about life following the sale of a business, it’s essential to plan for how you are going to fund the next phase of your life. You want to ensure that the sale of your business will provide enough for you to achieve your personal and financial goals. We often find that business owners have not calculated their Wealth Gap or how much money they will need from the sale their businesses. It’s the difference between what you currently have saved outside the business and how much you need to save outside the business to provide your desired income.
The first step is to determine your net worth and the gross income you will need post business transition to continue living the lifestyle that you and your family have become accustomed to. Once you’ve done this, you will be able to calculate your Wealth Gap, or how much you need to net from your business transition. Most owners don’t have enough of a nest egg or assets saved outside of the business and will be dependent on their business transition to fill this gap.
This means that you will have to sell your business for a specific price in order to achieve your goals and fund the next stage of your life. However, when it's time to finally sell, many owners find out that their businesses are worth less than they had hoped. In addition, owners often make the mistake of ratcheting up their lifestyles to match the increasing company profits instead of saving money to diversify their holdings and reduce their risks. This often happens because they have the expectation that the sale of the company will be enough to support their retirement.
If your current business transition options won’t net you enough money to meet your financial needs, you can take action to bridge the gap before you transition the ownership of your business. There are multiple ways to close the gap, including:
- Saving more money outside the business
- Increasing the value of your company
- Decreasing your spending and income needs
- Developing additional sources of post-transition income
Saving significant money outside the business not only reduces the Wealth Gap but also gives owners more transition options. For example, you may be able to afford to sell the business to your children or key managers instead of an outside buyer.
Proper planning and sufficient time can enable owners to address these issues, increase the value of the business, and fill in the Wealth Gap. If you begin well in advance of a transition, you can be proactive about saving more money and lessening your dependence on the business and the upcoming ownership transition. You can assess where your business is in its lifecycle and take action to increase the value. This proactive action can have a dramatic and positive impact on the business and your financial well-being.