December 2023
Imagine a world where every entrepreneur’s hard work culminates in a legacy that not only propels their dreams forward but also provides them with the ability to live their best life. Yet the harsh reality is that for some owners, all the years of hard work and sacrifice don’t materialize into the wealth and freedom they imagine. Why is this? The short answer is that most owners don’t engage in exit planning early enough, so they don’t know the options available to them in order to maximize their outcome. To achieve the result you desire, we recommend taking these actions:
The wealth gap is the difference between the value of your business on an after-tax basis and the funds you need to live the life that you want. To minimize this gap, first, dream about the future you want to create for yourself and your loved ones and understand the income you’ll need to accomplish this. For some, it could be buying a second home, setting up a family foundation, or dedicating funds to their grandkids’ education. Once you have a vision, or a North Star, of your life after the business, then calibrate the current value of the business using an independent third-party valuation. Most advanced estate and tax-saving strategies need to be considered and structured before the sale of the business. By creating a road map that encompasses all aspects of your financial life—assets, income, taxes, insurance, and estate structures—as well as your aspirational goals, you will have a strategic framework to guide you in stewarding your wealth that aligns with your life plan.
By taking the time to incorporate your business value with your personal financial plan, it puts you in a much better position to understand what your options are. I often hear from transaction attorneys that most owners focus solely on price but don’t understand the importance of “deal terms.” In order to get the deal done, bankers and attorneys often need to use creative structures like rollover equity from the acquiring firm, an earn-out structure or an employment agreement. All of these can have a meaningful impact on an owner’s financial future. At Morton, we create different scenarios of potential exit options both ahead of the transaction and during the transaction with feedback from the investment banker, CPA and attorney. If the owner has done the work ahead of time, they’ll have a higher degree of confidence to move forward when it’s time to memorialize the deal.
At a minimum, your external advisory team should include your CPA, estate attorney, wealth advisor, business transaction attorney and your investment banker/business broker—assuming an external sale. Depending on your circumstances, you may also need to use a commercial banker, ESOP specialist, or family consultant.
While all members of the team have deep knowledge in their specific domain, it’s critical that someone besides the owner has a deep understanding of the bigger vision and the outcome the owner wants to achieve, both for the business and for their personal goals. A qualified exit planner has been professionally trained in a holistic body of knowledge that helps an owner become transition ready. To use an analogy: If you were building your dream house, do you really want to act as the general contractor? Or would you prefer to partner with a general contractor who has expertise in building dream homes or, in this case, your dream future?
Through proactive planning, you can tilt the odds in your favor of creating the future you envision. Understanding your business and personal financial goals—as well as the exit planning process and its timeline—will inspire you to take action and increase the likelihood of a successful transition event. And by leveraging a team of trusted advisors, who are able to champion specific initiatives on your behalf, you will be able to stay focused on running your business. Our Strategist by Morton offering is focused on improving outcomes for business owners. If you are interested in learning more, click here.
This article was featured in the LA State of Business Readiness Report published in the Los Angeles Business Journal, to read the full report, click here.
Disclosure: Information presented herein is for illustrative and educational purposes only and should not be treated as legal advice. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, legal or tax advice. These views should not be relied on for the purposes of avoiding any federal tax penalties under the Internal Revenue Code. You should seek tax and or/ legal advice from your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances. Morton Wealth makes no representation that the strategies described are suitable or appropriate for any person.
