When the first wave of baby-boomer clients reached age 65 in 2012, that milestone triggered interest in retirement income planning on a massive scale. In turn, financial advisors have begun working much more specifically with their clients on determining the drawdown of assets from their portfolios to fund their retirement lifestyle.
However, a significant number of retirement-minded baby boomers don’t have investment portfolios large enough to generate the income they desire because most of their wealth is tied up in their business. That situation has spawned an entire industry and a slew of books, consultants and other information sources regarding succession planning for business owners.
Given that the upsurge in business owners contemplating their exit from their business is relatively recent, I was somewhat surprised to come across a book on the subject that was written five years ago by John Leonetti, entitled Exit Your Business, Protect Your Wealth: A Strategic Guide for Owners and Their Advisors.
Even more impressive than this book’s prescience, however, is the insight and content emphasis in this guide. As a student of this topic who has read many books on this subject, I would have to say that this is the book every business owner (and their advisors) should read first.
What sets this book apart is that unlike most others, it is not a book that tells readers how to increase value before selling or how to negotiate with prospective purchasers or what process to follow in marketing the business. Instead, the emphasis is on the business owner’s “readiness” to retire – both mentally and financially.
I am confident that even if business owners are consciously thinking about whether or not they are prepared to retire, those thoughts are not something they incorporate into their planning. This book presents a logical way for entrepreneurs to determine where they fall within those two dimensions of readiness and, as a result, gain quick insight into the transition options that make the most sense and are likely to lead to a positive succession outcome.
Leonetti uses a series of charts to illustrate the relative positioning and exit options, depending on where the business owner ranks on the scale of mental and financial preparedness. Let me summarize:
The process of determining where a business owner fits begins with a statement of goals in retirement, so that he or she can look at the array of exit options available to see which might fit and which won’t.
@page_break@If, for example, the goal is to retire within a fairly short time frame in order to pursue some other activity, options such as growing the business, increasing savings or an employee stock option plan probably don’t fit because of the time required to carry these strategies through to completion.
On the other hand, someone who wants to keep a hand in the business, perhaps by mentoring his or her successor, would probably be able to consider a management buyout.
There is, of course, a financial reality to retirement, which the author dramatizes with a simple illustration showing that it would require $150,000 of invested assets earning 6% a year to offset a $500 monthly lease payment for the business owner’s automobile that previously had been paid for by the company. That kind of insight is useful in deciding whether the time and circumstances are right for the business owner to sell and, if so, how the deal should be structured in terms of a deposit and ongoing payments.
Valuation is an important part of any decision about exiting a business, and the book does a good job of reminding us that internal sales to management, partners, employees or family members typically result in lower prices than external sales to competitors. Again, depending on the seller’s income and cash requirements, certain options work better than others.
As the subtitle of this book suggests, this guide is not just for business owners contemplating their exit from their business. The book also is a great resource for advisors who can assist clients with this important stage in their lives.
In fact, the author is a former advisor and certified financial planner who now heads his own firm, which offers exit planning training, design and solutions for advisors and their clients who own privately held businesses. Consequently, Leonetti goes to considerable lengths to differentiate between “transactional” advisors who work to help business owners achieve the highest price and “relationship” advisors who work to help clients achieve the greatest peace of mind.
I heartily recommend this book on two fronts: as a thought-provoking exercise for business owners, and as an excellent resource for advisors working on succession plans – either for their clients or themselves.
Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors by John Leonetti,
www.pinnacleequitysolutions.com; 238 pages, $29.95
***
© 2013 Investment Executive. All rights reserved.