Over 30 years, Laverne and Shirley (not their real names) had built a successful manufacturing company. Even during slow years, company revenue growth was constant, and year in and year out, Laverne and Shirley invested and reinvested in their company.
During our annual planning meetings, we repeatedly recommended that each owner put some money into non-business investments to fund her retirement. We suggested real estate, stocks and bonds, but each option landed on deaf ears. “The return we’re getting from our company is far better than any investment you’re suggesting.” That was true when you factored into “return” the lifestyle and perks that the company provided its owners. Laverne added, “We believe that if put as much money in our company as we can, when we go to sell it, we have will have more wealth than we need.” “Well,” said the more conservative Shirley, “we’ll have enough live they way we want to.”
Still, we persisted. Still they resisted.
At the end of their last fiscal year, something changed. The value of each owner’s share in the company accounted for close to 80% of their net worth. Eighty percent got their attention. So did the question we’d asked for years, “Do you know how much the post-exit lifestyle you wish to live will cost?” They did not, but they did recognize that the proceeds from selling their company would have to fund their retirement.
So, we started, as we always do, by asking them to describe their “ideal” post-business lives or what they meant by “financial freedom.” We then calculated the “cost” of that freedom. Only then did we tell the two that their business would have to sell for $9,000,000 for them to have the financial freedom they desired. That number really got their attention.
“Nine million dollars?” asked Laverne. “At most, it is worth $5,000,000,” added Shirley. “Our $9,000,000 number takes into accounts transfer costs and taxes,” we explained. The resulting silence told us that the owners had failed to take those deductions into account.
Sadly, these owners did not have sufficient non-business assets to generate the income they needed to live the post-exit lives they desired.
“As I see it, you have a decision to make,” I observed. “You can work to increase the value of your company from $5,000,000 to $9,000,000 and delay your retirement until that happens, or you can sell as planned and adjust your vision of an ‘ideal’ retirement.”
These are not pleasant conversations for anyone. Not for the owners who must make a very difficult choice. Not for advisors who wonder what else we could have done to avoid this situation
What we can do is share this story with the business-owner clients who come into our office for advice and are so focused on their companies that they forget about life after ownership. Today I share it with you in the hope that you will look at your ownership from a broader perspective.
Patrick Carroll, CFP®, CExP™ is the founder of Obsidian Business Solutions, author of Tame Your Money Elephants (Apple Ridge Press, 2016) and creator of The Lifestyle Protector Process™. He helps business owners grow their companies and meet their post-business financial and life goals. You can reach him at firstname.lastname@example.org or 301.990.1165.