Exit Planning – Knowing Your Number

Wherever you are in your business journey, there will come a time when you want to exit, either to finish work or to head in a new direction. Knowing ‘your number’ – the amount you want to sell your business for – is, of course, critical.

Unfortunately, many business owners pick an arbitrary number based on what they think they want or need for life after the exit. While at first glance this may seem reasonable, it leads to several problems, all centring on the question: How do you know that number is enough?

Without working this out, you’ll never know when is truly the right time to exit.

• If your business is worth significantly more than you need, could you exit sooner and enjoy doing other things with your time?
• If your business is worth significantly less than you need, can you increase your business value (within a defined timescale) or adjust your anticipated post-sale lifestyle?

Case study

Malcolm* built a successful technology business, though he was regularly working 7 days a week and seeing little of his family. He dreamed of having more time with his wife, Sarah, and      their 3 daughters before they flew the nest. However, as Malcolm was only 45, he had grown to believe that his business needed to be worth £10m before he could sell.

When we first met Malcolm, it was clear that there was no foundation for this figure. It was based on the value of other similar businesses which associates had sold. However, when we questioned the couple, it was clear that Malcolm and Sarah had no clear idea of what life looked like beyond the sale – what they wanted to do, have, experience; what security they needed and what legacy they wanted to leave. In short, they didn’t really know whether £10m was enough, too little or too much.

The implications were significant – Malcolm faced at least a further 3 years working long hours to build the business. Through our WealthPlan™ process, we helped Malcolm and Sarah get clear on their vision for the short and long-term future, enabling them to decide if the sacrifice was necessary. In their case, it wasn’t. They sold the business in six months for £7.2m and are now enjoying the next phase of their life.

The cost of your future vision

Now you can see that when we talk about ‘your number’ what we’re actually talking about is the cost of your vision of how you want to live post-sale.

Whilst the scale will differ from business owner to business owner, all face the same challenge of when to sell. The beauty of knowing your number is that it removes the fear or anxiety associated with exit planning, you can make clear decisions based on sound financial plans.

All too often, business owners get their thinking the opposite way round. They review their business, estimate its value, and then decide if that feels like enough.

The truth is, when a business is building in value year-on-year, it rarely feels like enough. It’s human nature to want more. So you have to know when to press ahead, and when to stop. Knowing your number gives you a firm footing to make the decision that’s right for you. Time is such a precious resource, it’s important to be led by your lifestyle goals rather than building value for value’s sake.

Conversely, it’s futile to build dreams of a particular lifestyle post-sale which cannot materialise because you didn’t know how much you needed and sold too soon. No-one wants to feel a sense of disappointment at the value of what is usually their life’s work.

Working on a detailed plan

The most important step you can take before considering the sale of your business is to get a clear vision of what life looks like after the exit, something that can be surprisingly difficult to do.

That’s why one of the most crucial steps in our WealthPlan™ process is ‘life planning’.

Whilst you can perhaps describe wanting to spend more time with your family, moving to a home in the country or planning travel adventures, it is unlikely you will have developed a specific plan mapping out what money you will need year-on-year to underpin these goals. Equally, you will need to take into account your financial obligations and/or the legacy you wish to leave.

So when we explore further, there are two gaps which need to be considered: the ‘big picture’ and the ‘details’.

The big picture is a clear vision of how you would like life to be. This is a creative process where you can truly ask yourself if anything was possible, what would my ideal life look like? The detail is about reverse-engineering the vision to look at what needs to be in place to bring the vision to life. It’s about looking at exactly what needs to happen, by when, to create the required financial freedom.

Case study

John* had worked long hours building his haulage business through two economic recessions. He had enjoyed success but dreamed of moving to the country and spending his time collecting and renovating classic cars. In his late 50s, he thought he needed in the region of £3m from the sale of his business.

Throughout a couple of meetings with John, it was clear that he also had other priorities for his finances, which hadn’t been properly considered or factored in. He was incredibly keen to fund a university education for his 3 daughters and to help them buy their first homes. He also wanted to buy a property in the south of France and spend at least 4 months of the year living in the sunshine, as well as enjoy three or four trips to new places during the year.

Once we had helped John to articulate a clear vision for his life beyond the sale, we were able to reverse engineer the cost of that lifestyle and enable him to be certain about the sale value of his business. He decided to work an extra three years to ensure he could sell the business for £5m instead and is now enjoying his retirement, safe in the knowledge he can do everything he wants to do as well as be a generous father.

*Names changed to protect privacy.

A financial plan to steer your exit

As you can see, it’s the combination of the vision and the detail that enables you to understand the cost of life beyond the exit.

There is incredible freedom in working out ‘your number’ and designing life after the sale before you’ve even begun the exit process.

A well thought out plan (which we can help you with) will reduce indecision and anxiety in the lead-up to the sale and will give you the clarity you need to make decisions about life beyond the exit. But, perhaps more importantly, will give you the freedom to enjoy life to the full once you’ve exited your business.

Now that, without doubt, is true financial freedom.