Introduction: Down to Business

For decades, the couple contributed to a variety of community outreach efforts and had been particularly involved in animal welfare programs, working with the local Humane Society and an organization that traps, neuters, and returns feral cats. They adopted a basset hound through a rescue program, and the wife eventually became president of that organization. They welcomed dozens of foster hounds to their house as they worked to find the hounds their forever-home.

That sort of charitable work had long been their joy. Now, as they reached retirement age, it was time to transition the husband’s longtime business so that they would have the resources to continue their lifestyle—including their contributions to those organizations. They did NOT wish to retire from animal rescue and welfare. They devoted a lot of time and money to these efforts and intended to keep up the good work.

The couple did not doubt that the business would sell for a fair price, but they needed to resolve a concern that could stand in the way of their dreams. Much of their charitable support had come from the firm’s profits, a perfectly permissible practice under the corporate structure of the business.

The firm often sponsored events or advertised in support of, and could deduct those costs as advertising expenses.

That would not continue, of course, once the husband no longer controlled the business. Nobody was going to buy a business with a contingency to continue a pattern of giving. They needed answers. They were financially responsible, investing and saving diligently for retirement as the business continued to grow. For years, however, the firm had supported an important element of their lifestyle—their charitable work—through means other than direct owner income.

As the couple contemplated retirement, they could not imagine having to give up their passion—but what would the numbers say? Would they be able to afford their charitable ways after selling the business? Even if it appeared that they could keep it up, should they? Retirees often want to play it safer with their investments in case the market takes a dive. To take on less risk, retirees often accept a lower rate of return than in their younger years. That generally means a reduced opportunity for income production.

The couple quickly concluded that the answer to their big question would depend upon the value of the company. How much would it yield for them when it sold? That would be the only way they could accurately gauge how their cash flow would look and how they could answer that question of risk vs. return. They needed to complete a financial plan to help them see the big picture.

Imagine yourself in that situation. Through the years, you have devoted yourself not only to your career and your business but also to heartfelt causes that your business has helped you to support. You want to sell the business to provide an income stream that will continue for a lifetime, but you are just not sure whether you can make it all work. What do you do?

Unfortunately, many families fall short of reaching reassurance. They have not adequately estimated their future needs and wants, and they have not reconciled those requirements with the likely value of their assets. Many business owners have only some vague idea about what their company might be worth and tend to get things wrong on two counts: 1) They overestimate how much money they will have after the transition, and 2) They expect a relatively quick and painless sale when the time comes. They may imagine they are operating a $10 million firm, but as it stands a buyer might only be willing to pay $7 million. To get a better perspective, they need a professional valuation long before the exit. That way, they can proceed realistically, building the company to meet their goals and adjusting their cash flow expectations accordingly.

Let’s say you own a business but do not intend to run it for all eternity. You expect to transition it someday from an illiquid asset into a liquid one that will see you through for the rest of your days.

You need to know two things right away: where you are starting, and where you are heading. How much fuel is in your car now, and how much must you fill it up to reach your destination? What is your business’s value now, and how much must you grow it in the years ahead so that you can meet your retirement benchmark? What do you need to be doing now?

Those are big questions. Keep reading. You will discover some answers.

INVESTING IN SUCCESS

As the founder of Berkshire Money Management (BMM) and 10,001 Hours, I am a business owner who often works with other business owners. We speak the same language, and we face similar issues and concerns. In addition to our longtime services as investment advisors and financial planners, I am certified as an exit planner. By assisting with the “exit,” this means that I work with business owners to deal with the details and make the right connections to sell or otherwise transition their life’s work to new ownership. I help fellow business owners get ready to move onward, whether they are in the midst of negotiations or starting to think about a sale that might come years hence. An early start is a better start. Selling your business is a process that involves strategic planning and increasing owners’ income, and that takes time. So, it is better to start early.

Since our services also include portfolio management, we attract clients who see wisdom in our investment approach. For business people, a big part of preparing for the eventual sale of their company is investing the proceeds wisely and confidently through the retirement years. My career in financial services has spanned boom years and bust years in the economy and the markets, and those experiences have helped to shape a philosophy that serves families well no matter what economic cycle the investment markets either enjoy or endure. Although this book is not an investment guide, let me share an overview of the BMM approach, because investing your liquid assets is an important part of creating the personal life you want after you wind down your business life.

Many people wisely delegate their investment decisions to professionals. Being business savvy does not necessarily translate into being investment savvy. Often people invest emotionally, chasing some hot tip or trying to emulate the choices of a neighbor or wealthy uncle or some “guru” who seems to have the answers. Do-it-yourself (DIY) investing is inherently risky, as has been shown repeatedly in studies by Dalbar, a research firm that compares individual portfolios with the performance of the major indices over a twenty-year period. The do-it-yourselfers invariably come up short. They tend to invest irrationally. They ignore bargains and buy what is overpriced—yet this is not how they shop at the supermarket. If tuna fish is on sale for fifty cents a can, they fill the pantry. They do not wait until the price rises to $1.95. When a stock falls to a bargain price, though, they want nothing to do with it. They are eager to buy it only when its price rises to a premium. Buying high and selling low is a proven strategy for going broke, and that is what happens when fear and greed govern the decision-making.

Honestly, it is not the fault of the individual investor. The amygdala, a section of the brain that is responsible for detecting fear and preparing for emergency events, overrides the rational prefrontal cortex and pushes humans to sell when stock prices go down, in an effort to seek self-preservation. If you’ve ever sold a stock because its dropping price scared you, you are not weak. Rather, your brain is acting just as it is designed to.

The professionals understand that they must not fall victim to emotions. To hold themselves accountable, they will gather around a conference table and examine every reason that a prospective investment choice might be faulty or premature. Individuals do not do that. More typically, a do-it-yourself investor will be staring into a computer screen at two o’clock in the morning, forehead in palm, fretting over a security that has slipped relative to a day, a week, or a year ago. The click of a mouse can take the immediate pain away—even if it will only worsen the pain later.

The behavioral aspects involved in investing have become a field of academic study. The emotions and beliefs that motivate people’s choices and strategies often are rooted in their early experiences with money. The best defense is to be aware of the biases and weaknesses that can lead to poor decisions. Like the pros who gather at the conference table—always be accountable.

PUTTING THE PUZZLE TOGETHER

Although my practice is based in western Massachusetts where we serve hundreds of families and businesses, anyone across the land can benefit from this book. The investment principles of my firm are universally sound, as are the strategies for building a business to get it in good shape to transfer or sell. Many enterprising souls have come to me with complicated business situations in need of sophisticated service, and I know that their experiences are far from unique. Much of what I am imparting in this book will be directed toward business owners everywhere interested in building their incomes and fortunes. They must succeed not only to serve their customers and clients but also to provide a good livelihood for themselves and for their families.

I am more than an advisor on how to build a business. I am a business builder myself. And a business seller. And business buyer. I understand the responsibilities and pressures of shepherding a firm. Hundreds of households rely on the guidance that my firm provides to them. Therefore, I must ensure that my firm continues as a reliable and enduring entity that is able to serve them well—while also serving my own family well, for decades to come. Even now, long before I retire, I must consider all my exit options—because not all exits are voluntary. I owe that to my own family, and I owe it to the families who depend upon our services.

As a Certified Exit Planning Advisor, I help people build their businesses. As a comprehensive financial planner, we help these folks to take care of business in a broader sense. Together, we work on the bigger picture of meeting goals and fulfilling dreams. We advise clients on such issues as estate and tax planning, risk management and insurance, college funding, Social Security and Medicare strategies, and more, working with our network of attorneys, accountants, and other professionals when the situation calls for a particular field of expertise.

Teamwork is essential for success, as any savvy business person understands. We have years of experience at coordinating with various professionals to accomplish specific goals for the families that we serve and to ensure that they are equipped with a breadth of knowledge and understanding. Business owners need a variety of services as well to build toward the best possible exit, and I coordinate the professionals on the team to make that happen. We each do our part to fulfill visions. Together, we assemble the pieces like a picture puzzle.

SO MANY MISTAKES

Over the years, I have heard similar questions from those who seek our services. Some of those concerns are ones that they should have broached much earlier, such as: “I’ve sold my company, so what do I do now with this pile of money?” or, “My partner is buying me out this year and it’s all self-financing, but I have just a couple questions …”

Yes, problematic arrangements do tend to generate questions. We are happy to offer some answers. We have met many smart people who knew how to run a business but did not know how to get out of it. For many, it was too late. They had given themselves a glorified job over the years and provided well for their families, but they had not created a transferable business. The business either could not run without the owner or else it relied on a few key employees, often without retention agreements. The owner may have been able to draw more income and add employees, but did not develop a scalable operation with repeatable processes. He or she did not attend to the many details that make a business attractive to a potential buyer. He or she did not make it transferable.

We saw so many mistakes that I decided to expand my professional credentials. I became a Certified Exit Planning Advisor (CEPA) through the Exit Planning Institute (EPI). My goal has been to reach out to an increasing number of business owners to help them to make wise decisions. An exit strategy is a business strategy. The objective is to maximize wealth through best practices and to make your business transferable to the next generation of owners. By preparing for the best possible exit from the business, the owner can achieve life goals and leave an enduring legacy. The pursuit of those personal goals is what should drive the business. The state of the business should not be determining the personal goals.

ALL THE RIGHT STEPS

I have been through this type of planning personally. I started BMM with a partner, and both of us clearly understood from the start that I would be buying him out in a few years. He was running operations, and I was handling investments for clients. I knew that we needed to prepare for his departure and to find his successor since I would be unable to do both jobs. We drafted a buy-sell agreement to formalize the succession plan and, in the meantime, included a provision to financially protect our spouses if either of us were to die. We established workflows and processes. Upon his departure, I purchased the investment management side of the business and the financial newsletter that we had been publishing. I continued to build subscriptions and sold that newsletter a year later.

From the start, we began building the firm knowing that my partner would be leaving. We developed a plan to accomplish that smoothly. I gained personal experience in working through those steps of buying, building, and selling. In addition, I have since been pursuing a long-term strategic plan, breaking down my vision into shorter objectives as I prepare for that distant day when I will be making my own exit. In short: I have walked what I talk. I know the right steps.

Deciding when and how to exit the business is confusing for many owners, and I do mean many, as baby boomers are retiring in droves. Some have carefully planned for the departure from the business, preparing for any contingency, while many others are forced into the exit by financial or health issues. They may be running a thriving enterprise, but they get laid out by a punch they didn’t see coming. They lose a major customer or supplier, or a competitor crushes them. An unexpected health crisis or disability decides the matter for some.

In general, though, retirement is not the short stretch that it once was. People are living much longer these days, and they often enjoy good health for decades beyond what traditionally has been the end of their working years. In fact, “retirement” is a misnomer: for many, this stage of life is an opportunity for new endeavors, perhaps even a new business. Others want to be sure they will be able to continue pursuing the passions that long have brought them fulfillment. Playing golf, as one example. Or rescuing basset hounds, for another.

All those years come at a cost, however. A long, active life is expensive. You need to begin preparing now for financial demands that could continue for decades. That means taking the right steps to build your business to its fullest potential, long before the exit.

In the months ahead, I will offer some guidance on those steps and when you should take them. We will look at how to build a business so that it can generate resources to last a lifetime and beyond. We will see how to get a snapshot of how much your business is worth now; that way, you can assess what needs to be done so it will meet your needs when the time comes for the exit. We will examine specific ways that you can build toward that maximum value, and how to invest outside the business along the way. We will see who needs to be on your team to properly prepare for the exit. We will look at how to shop the business around to get the best possible deal, and whether it makes the most sense to keep the business in the family or sell to a key employee or outside buyer. Once the deal is done, we will examine how to invest the proceeds wisely for many years of prosperity.

GETTING STARTED

You should begin planning your exit steps three to five years before your target date of sale or transition. You cannot accomplish all that needs to be done overnight. You will need time, for example, to document your workflows and procedures and otherwise clean up your act to attract a potential buyer. You may need months to recruit and train employees to improve key operations. These might not seem to be such onerous tasks in themselves, but can you fit them in around your many other obligations? Getting all the pieces in place often takes years.

That is why it is important to attend to these matters as early as possible. Think big. Strategic planning is a process of setting bold, long-range goals and then working backward to determine the steps needed to get there. What must you do each year, each month, each day? What might seem to be an impossible dream in a five-year or a ten-year plan will no longer feel so daunting when you break it down into achievable steps.

Although “exit planning” is a common term in the financial services industry, you will hear a variety of other terms for it: succession planning, for example, or transition planning, or strategic planning with an exit as an option. By any name, and whatever the emphasis, it involves the same major questions. At every turn, you are striving to build your business. It is your biggest asset, representing much or all of your wealth, and you are depending on it to see you through a long life. You cannot afford to make mistakes with it. You need to maximize the value of your business as you aim toward that day when you will be cashing it in and handing it to someone else. Think of exit planning as an investment in your future—and investments take time. It is time to get down to business. Let’s get started.