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    If You Miss Your Train, You Are Sure To Miss Your Exit

    Provided Courtesy of Tax & Financial Group

    The 1998 movie Sliding Doors is an interesting study in how seemingly small events can have magnified consequences over time.  In the first scene, Gwyneth Paltrow’s character rushes to catch a train for her daily commute.  The plot splits into two parallel narratives, showing how the course of her life diverges drastically depending on whether she catches or misses the train in either case by a split second.

    Sometimes it is obvious that small events or actions will have an enormous impact on our lives.  Often it is clear which path we are likely to follow if we take certain small actions that are entirely within our control.  For example, you can reasonably expect that a small amount of time devoted to planning for an exit from your business could make all the difference in whether you achieve your most important life goals.  We’ll look at a hypothetical example of this here.

    John is 61 years old and owner of ABC Widget Company.  In one universe John takes some time to plan ahead for an exit from his business.  In the second scenario, John repeatedly puts off planning because he is busy.  It is not hard to guess which scenario puts him in a better position to have a happy retirement and which leaves him stuck on the platform.

    Age 61:

    With a Strategy

    John works with a team of advisors to develop a personal financial strategy and a business exit strategy.  Based on his personal financial strategy, John will need to continue working full-time until age 67, and then sell his business to meet his retirement goals.  John expects to stay on for about 2 years after the sale in a limited capacity under a consulting contract. 

    John learns the company could probably be sold to a competitor today, but he develops a strategy with the expectation to achieve an increased valuation by age 67.  John monitors his progress each quarter so that he can change course quickly if necessary.

    Through the process, John gains valuable insights into the capabilities, motivations, expectations, desires and fears of the Company’s key employees.  As a direct result, John develops a plan B, where John sells the business over time to two key employees, Ruby and Steve.  Under this scenario, John expects to stay involved in a limited capacity until age 70.  John’s advisors help design this strategy and help present it to Ruby and Steve, who embrace the opportunity. 

    John takes steps to begin implementing Plan A and Plan B in parallel.  John retains control and flexibility over the ultimate outcome.

    Without

    Though John has not done any formal planning, he feels that he will be able to sell his business and retire at age 65.  He expects this will leave him be enough to meet his needs in yearly income for the remainder of his and Mary’s life. John is unaware of a variety of tax consequences and has not properly accounted for all of his living expenses in retirement as well as many serious risks to his financial future.  For the time being he is blissfully unaware of the “risks he may face in the future.”

    Age 62:

    With a Strategy

    Following his exit strategy, John implements new employee incentives to retain and incentivize Ruby and Steve.  Motivated by the opportunity to share in the firm’s success, Ruby and Steve each set very high goals for themselves for the following year.

    John’s advisors review the presentation of his financial statements and discuss positioning the company for a sale in a couple of years.  John’s advisors show him that companies in a fast growing niche of the widget industry sell for a 7-8x multiple of cash flow, while most others in the industry sell for a 5-6x multiple.  John takes the lead to reposition the company in this niche.  In accordance with his exit strategy, John holds weekly management meetings with Ruby, and begins transitioning certain of his responsibilities to her.  He also begins transitions other responsibilities to other mid-level managers in the organization.  Spending a little more time on strategy and a little less on day-to-day management has re-energized John and has made ABC fun and exciting again.

    Without

    John pays his key employees cash bonuses at year-end as he has done for each of the past 15 years.  Because it was an especially good year, John paid exceptionally large bonuses to himself, Steve and Ruby.  Shortly after receiving her bonus, Ruby takes a job with a competitor which comes as a complete surprise to John.  Steve’s workload has nearly doubled as he has to assume Ruby’s accounts.  Steve demands that an additional assistant is hired to help him manage the work.

    Age 63:

    With a Strategy

    John has reduced his work schedule to 4 days a week. The company hires a marketing person to help establish the company’s position in the niche market.  Through conference sponsorships, speaking opportunities and other marketing efforts, the company becomes widely-known as one of the emerging leaders in this niche.

    John is approached by a competitor who says he would be interested in buying the company.  After discussing the conversation with his advisors, John decides to decline to pursue the opportunity at the current time.  He gets back to the potential buyer and proposes revisiting the idea in a couple of years.

    Without

    John is approached by a large competitor, Widgets International, who asks if John would be interested in selling.  John says that he would consider it.  John sends Widgets International some high-level financial information.  The owner of Widgets International calls the next day to ask a couple of questions but then never follows up. 

    Age 64:

    With a Strategy

    Ruby is now managing the company day-to-day. He attributes this success to the time he has devoted to focusing on strategy and increasing value.  John is highly confident he could sell the business.  Because of the stock incentives they’ve received over the last few years, Ruby and Steve now each own 10% of the company.  John still holds the other 80% of the stock. 

    Without

    Steve has a stroke and goes out on permanent disability.  John is overwhelmed and fatigued, and begins to sense that his health is failing too.  He calls on Widgets International to see if they are still interested in buying the company.  Sensing John’s desperation and citing ABC’s poor financial performance and lack of management depth, Widgets International makes a low offer for the business paid out over three years.  John lies awake anxiously wondering whether to take the deal or to continue slogging away for many more years without Ruby or Steve to help carry the load. 

    Age 65:

    With a Strategy

    Two buyers compete in a bidding war for the company: Widgets International and Big Widgets Inc.  John chooses to sell to Big Widgets Inc. who purchases 90% of the company.  The three owners of Big Widgets are all about the same age as Ruby.  They ask her to join the team and help build the company over the next 8-10 years.  Ruby agrees.  Ruby and the Big Widgets owners begin thinking about their own exit together in 8-10 years.

    Without

    John decided not to take the offer and continues working.  As employees continue to leave, John is eventually forced to wind down the business. They continue to serve two small but loyal clients.  John doesn’t know when these two clients or his remaining employees will leave, but for the time being, depends on the income for his retirement.

    We all understand the benefits of planning early in many aspects of our lives, but it’s easy to procrastinate when the task feels overwhelming.  But even a few small steps can make a huge difference over time.  Engaging an experienced exit planner is the first step that can make all the difference.

    For more information, or to request a copy of the Tax & Financial Group Report of Closely Held Business Owners: The Exit Planning Process, please contact Scott Petersen at scott.petersen@tfgroup.com or 949-223-8262.

     

    This is a hypothetical example used solely for illustrative purposes. It should not be interpreted as a blanket business planning recommendation. Each client's situation will vary.  This information should not be considered as tax advice. You should consult your tax advisor regarding your own tax situation.

    Securities and Investment Advisory Services offered through Securian Financial Services, Inc. Member FINRA/SIPC & A Registered Investment Advisor. Tax & Financial Group is independently owned and operated. 1845423 DOFU 7/17

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