Podcast: How Much Money Do You Need From an Exit to Be Financially Secure?

By Noah Rosenfarb
Published: November 23, 2016 | Last updated: April 15, 2024
Key Takeaways

Valuation is important when selling a business, but after-tax proceeds are even more critical. Learn about methods to figuring out how much money an owner needs to be financially secure.


In this session you will learn about:

  • 3 things any owner can do right now to start preparing for an exit;
  • 3 common pre-sale tax and estate planning opportunities;
  • The most common mistake owners make when discussing an exit strategy with their executives;
  • A method to figure out how much money an owner needs to be financially secure; and
  • The best way to discuss an exit strategy with internal and external stakeholders.

About the Guest

Mr. Joseph Bazzano brings nearly 20 years of experience in public accounting and valuation services to closely-held companies of all sizes. His areas of expertise include financial reporting, mergers and acquisitions, exit strategies, tax planning and compliance with individuals and business entities in the manufacturing, construction, wholesale and real estate industries. He operates Private Equity Transitions and Bazzano & Rosenbloom.



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Read the Full Transcript Here:

Noah Rosenfarb: It’s Noah Rosenfarb and here with me today for the Divestopia Exit Strategy Podcast is Joe Bazzano. He’s a CPA and a principal at a CPA firm as well as a principal at a private equity transitions. Joe’s an advisor focused on exit planning, in helping owners successfully transfer their businesses and am really appreciative to have him today. Joe, thanks for coming. I want you to start us off with telling us based on your experience what three things can owners start doing right now to prepare for an exit?


Joe Bazzano: Well, Noah, thanks for having me. Well one of the first things that I would suggest that business owners do is really educate themselves on the whole process. Because there’s so many moving pieces in transferring a business, it’s important to learn what the options are, and more importantly don’t wait until the last minute. To give you an idea on how overwhelming it can be, I’m going to give you an example of a business owner’s comment that I received just yesterday. I was working with an exit-planning client, who’s been in business for over 40 years, and during one of our exit strategy execution meetings made a comment that truly resonates with me, and it may resonate with a lot of business owners as well.

What he said to me was this is so overwhelming; I’m glad we got this process started sooner rather than later. What makes it even more challenging is the fact that this particular business owner is having a hard time letting go of the business and pulling the trigger on the execution. But education is important and as you educate yourself there’s three major areas I think most business owners need to focus on.

The first aspect, or the first area, is that of valuation. Business owners need to understand what the value of their business is and what their business is worth. And more importantly, what the business is worth based on an exit strategy that’s selected. Educate yourselves on how you can work on your business and not so much in your business. It’s critical that business owners understand that they need to become a CEO, a visionary, and a leader as opposed to just another employee in the business. Working 60 to 80 hours a week doesn’t necessarily create value in your company, if you’re not doing the right things.

The second piece that needs to be focused on is that of taxation. Even though you may recognize a lessor value in a particular exit strategy the tax benefits may be such that you may net or realize more from another exit strategy that may provide you a higher sales price. So the important focus here and the important concept to remember it’s not so much what you get but what you keep that matters.

And the third item that you should focus on when you educate yourself is that of dependency on the business. Like the exit plan that I spoke about earlier who was having a hard time pulling the trigger. You need to realize how dependent you are on this business. It’s never easy saying good-bye and this business that was created is no longer what you do but eventually becomes who you are. And what I mean by this is because your business is a significant part of the community, people in that community may now start to look at you and recognize you as Joe the Accountant or Joe the Contractor and not just Joe Bazzano.

So the next thing that people should start to do is basically start working on their financial statements. Financial statements are critical components to this successful transfer of the business. And the financial statements tell a story about the business; they not only tell you how strong the company is but it also how fit it is. The balance sheet will tell potential suitors how strong the company is. For example, a company overwhelmed with debt will not only provide strong pictures of the company, conversely a profit and loss statement or an income statement will strengthen the potential suitor how fit the company is.

Now what I mean by this is a profit and loss will tell you whether the company is running just to keep up pace or is it running ahead of the pack. I think in addition if you’re thinking of exiting in the near future invest in accountant prepared financials. Attorney prepared financials typically don’t provide you the best story of the business, even if you plan on selling your company internally, your advisors such an appraiser, will be able to provide much better product if he or she is working with good numbers.

And the third item that I think is very important a business owner should start doing right now is to work on the creation of a solid management team. I’ll give you story. A good friend of mine and a colleague, he’s also a business appraiser, he came up with a very simple equation to define values. He said that the value of a business equals the cash flow of a business has to be both transferable and sustainable. And then you multiply that by some certain market multiples.

Now understand that unless the business can provide future cash flow, it’s of little value to anybody. Therefore, in order to make cash flow sustainable and transferable, there must be an individual or a group of individuals that can make that happen when the owners no longer in the business.

This is critical to what outside buyers are looking for. So again, it’s difficult for a business owner sometimes to let go of control but he needs to understand that once he’s no longer sitting in that chair the company needs to realize the same type of profitability, if not more.

Noah Rosenfarb: I think those are three great areas; you know, the education, preparation of quality financial statements by an expert and building a management team. The one that I think is most difficult for owners to accept early on is the education component. What’s been your experience with the reasons clients defer getting the education or the reason they – once they have the education – they often times defer the implementation?

Joe Bazzano: Well I think that’s two very distinct questions. The first is many business owners don’t really understand what they’re being confronted with and as such there’s not a lot of education out there. I think that’s changing a little bit now. I know we provide many seminars and workshops to help educate business owners on all aspects of exit planning, and then the other question that you mentioned the failure to execute. Typically what happens is once they get educated, they go back to their business and they become involved in their business again and overwhelmed with the day-to-day activities. It just loses its steam.

So I think those are two key points where you just have to make a consciences effort to execute, but I think from an education standpoint there’s a lot of business owners out there that are thirsting for this knowledge. They just don’t realize that it’s out there and maybe some don’t even realize that they actually do need it because I think a lot of business owners think that the typical answer is, “Well, I’ll just sell my business in five years,” and maybe they think they’re just going to put a “For Sale” sign up and it’s going to get sold. But the hard reality is that the odds are against them.

Noah Rosenfarb: One of the things you were talking about is on the execution side, and what I find is some of the easiest things to execute relate to tax and estate planning opportunities, because most of the heavy lifting is done by outside professionals and the return on investment tends to be really significant. Why don’t you share with me some of the common presale tax and estate planning strategies that you’ve used with your clients?

Joe Bazzano: Well, I think one of the biggest items is a buy-sale agreement. Although you may not think of a buy-sale agreement plays a big role in estate planning, it can have a profound effect on family dynamics. I’m actually working on a client right now whose sole owner passed away unexpectedly, apparently did all the right things. He created a will; he established trusts for the benefit of the family, even purchased life insurance; however, a problem occur when you made corporation the beneficiary of the insurance policy and then he put the stock of that corporation in a trust.

Now there’s some complexities in and of themselves in a stock ownership rules of a deceased owner, but absent some of the significant – absent that, some significant complications arose. Most notably was the fact that the family did not have a sense of what the owner truly wanted to happen with the business. There was no buy-sale agreement or other documents that expressed his intentions of what was to happen to the business. Now this business owner had five children, two were very actively involved in the business.

Two of the other children’s spouses were active in the business and one did not participate in the business whatsoever. But the question that arose subsequent to the owner’s death was whether the insurance was to be used to buy the stock from the estate and improperly owned or did he mean to artificially double the value of the company by trapping insurance benefits in the trust and provide more value to the spouse, to the widow.

The second option that I just described would create a big funding problem for the rest of the family who now has to pay double the price for the business. So right now we’re in the process of – we’ve completed the plan. We’re in the probate process, but we think our exit plan’s going to be a big foundation for arguing that option one is most advantageous to the overall family’s wellbeing.

Noah Rosenfarb: Yeah. And having that buy-sell agreement in place would have made a significant difference.

Joe Bazzano: Correct. Well it gives everybody the understanding of what the owner’s intentions were and it makes the execution, again, we’re talking about execution, makes it much easier to proceed. And it takes away any uncertainty and misconceptions.

The next opportunity, again, it’s understanding the difference between maybe a stock sale and an asset sale, and the tax consequences in planning opportunity associated with each transaction. When we do these analyses we often look at strategies like perhaps a 1202 Gain Exclusion, which allows business owners the ability to exclude all or a portion of the gain on the sale of stock.

Some of these things are not – or these strategies are not well known but they are out there and they could provide considerable tax benefits to the seller. We also look at tools like the intentionally defective grantor trust. We look at the Section 338(h)(10) Election. Again, these could bring some significant tax savings in the proper situations.

But it’s also important to know and understand that using advisors that are familiar with transferring businesses and that they could provide cost saving solutions to your transaction is of most importance. Probably the best example I can use to portray this importance is, you know, if you were to use an attorney who does primarily real estate transactions and closings, you wouldn’t necessarily use that attorney to prepare an exit plan for you or to defend you in litigation.

I think the same holds true in exit planning and that each advisor has a specialty area, and that each will bring distinct solutions to the problem. So I think specialty areas are critical to achieving the best results.

And probably another presale tax planning opportunity is really invest in an exit plan. A properly written plan will identify areas of strength and weaknesses within your exit strategy. The exit plan really should take you through various strategies and transactions before you actually go through them. And what I mean by that is an exit plan should paint the picture for you of what the transaction is going to look like. It should concentrate on the business personal and financial aspects of your lifestyle, and each of those areas should be coordinated with others in order to achieve the best results.

I think the most important thing to remember is that you only have one chance to get this right. That kind of reminds me of a question that I was provided or addressed several years ago when I was promoting my exit planning services to an advisor, and his question to me was businesses have been selling for years and years, why would anyone need to use your services. Well that kind of stumped me a little bit and I kind of thought about it for a while and as I reflected on the question I thought about the numerous examples that have come up in discussion about a business owners who didn’t understand how the transaction – they just executed – was going to affect their future lifestyle outside the business, or whether they’re going to have enough money to maintain that lifestyle after they leave the business.

It also made me think about those business owners who just closed down the business because there were no external buyers for their business. It’s important that business owners understand that if planning, the proper planning, is done there’s numerous options for exiting a business. Again, you just have to plan and be educated on those options and then be willing to pull the trigger and execute it.

Noah Rosenfarb: All good advice. So when a business owner’s done their planning and they’re getting ready to implement the plan, what do you think are the common mistakes they make when they’re talking about their exit strategy with their executive team?

Joe Bazzano: Well, a couple of things in this particular area. Exit planning can be a very difficult – technical and difficult subject to understand. There are numerous disciplines and techniques that come into play, and it’s common with many business owners they don’t fully understand the concepts. They know their business inside and out, but when it comes to exit planning and discussing exit planning a lot of this is foreign to them.

So because of the unfamiliarity with the process, the result is that many times the message is lost in the translation. I’ve had a few instances where the owner decided he did not want- he wanted to relay the message without our presence or guidance. Because of the complexity and the strategy to be employed, you could imagine how the message was delivered.

When he delivered the plan or the message it was misconstrued or just not really addressed in the same fashion that we set it out to be, and this caused uncertainty and delays. So now as far as our own practice he make it a mandatory that our presence and delivering the message on all our engagements. We want to make sure that we’re present. And this holds true not only to the executive teams but to the advisory team as well. Many times, again, key – the message is lost in the translation unless everybody understands the plan and is working towards the same goal, which is the business owner’s goals and the not the advisor’s goal. I think that’s the only clear way that this business owner is going to be successful on his exit.

The second common mistake that can occur when sharing some of this information is when the timing of the information. Timing is critical. I think letting the cat out of the bag too early can create some problems with not only the culture of the business but the production of the business, especially if the information is obtained by these executives either piecemeal or through the rumor mill. And in this case I like to use a real estate analogy.

In real estate it’s about location, location, location. In exit planning it’s about timing, timing, timing. And timing plays such a critical role not only in the planning stages but in execution, delivery of information, and so on. So I think those are probably two of the most important aspects of sharing information to the executive team.

Noah Rosenfarb: Good advice. And as far as timing goes, I think timing it’s been shown has such a great impact on valuation also. So that part of it’s critical for owners to understand as well.

Joe Bazzano: Absolutely.

Noah Rosenfarb: When the owners are dealing with their internal and external stakeholders, you know, the employees, the vendors, their contacts, does the same advice hold true about making sure you deliver the message clearly, concisely in a way that adds value to the listener and watch your timing. Is it exactly the same or are there some uniqueness’s there too?

Joe Bazzano: Yeah, I would say that a lot of the same issues occur. I think at this point confidentiality is your best ally. It’s often said especially when a sale to an outside party is being structured, it often says that every deal dies three deaths. So what that means is that you’ve come to terms and then there’s changes and everybody walks away and then they come back to the table and that happens quite a bit as negotiations occur.

You could imagine if you start letting out information to either your employees or to vendors and such, and the deal never comes true. That could create some problems down the road for profitability and the future operations of the business.

Noah Rosenfarb: And how about once the deal is closed, what would you say is the best practice in general for owners? Should they be trying to get on the phone with everyone, should they be sending out an email, do they need to send a paper mail? Do they send out the sales team? What would you say your advice is in general?

Joe Bazzano: Well, I think, in most situations unless the business owner gets cash up front, 100 percent cash up front, he’s got a little bit of invested interest in the future operation of the business. I think it would be in the best interest for the business owner to make personal contact to some of the major players. You let them understand the situation, let them understand that the new team that’s coming in is going to be continuing the same type of culture that you had and that things should go on as normal, especially if you’ve created that management team that can continue the process that you’ve created. I think that’s – they’re very important.

Noah Rosenfarb: If we take a look at different aspect of selling and focus more on the owner and the owner’s family, how should they go about figuring out how much money they actually need to feel financially secure?

Joe Bazzano: You know, when I prepare an exit plan for my clients, typically the defining moment in the plan is when the value gap is compared to the estimated net proceeds that one might expect to receive from the business. You’re probably going to ask me what’s a value gap. Well, typically the value gap is really the difference between the amount of liquid assets that you’re going to need to accumulate, that based on a reasonable rate of return, is going to provide you with substituted income that you’re going to lose when you transfer your business. And when you take that lump of assets, that liquid assets that you’re going to need and you compare that to the liquid assets that you already have accumulated, often times there’s going to be a gap, okay. We call that the value gap.

The important thing to understand is when you compare that to the net proceeds of the company, of the sale of the company; hopefully that number will fill the value gap. In other words, that number will be greater than the value gap number.

If it’s not greater, then that typically will create some problems for the business owner. He has to make some decisions. One is do I want to lower my lifestyle after I exit the business, or two, do I want to hang in there a little bit more, try to increase the value of this company so that I can maintain my lifestyle and fill that gap.

So there’s some pretty critical decisions that need to be made there. And I think a value gap analysis is critical to any exit plan.

Noah Rosenfarb: And in general when you’re working with an owner and let’s say they want, you know, $400,000 a year of income to cover their lifestyle, do you use some multiple to figure out the liquidity that they’ll need to cover that or do you do some more structured planning?

Joe Bazzano: Yeah. Well during our interview process, we try to identify if there’s any major acquisitions business owners want to make once they retire. I have a particular case where one business owner says, you know, when I retire I’d like to buy a nice farm with a big farmhouse and retire there. So next question is well, how much is that going to cost you? A million dollars. So we need to know that we have to account for a million dollars of that going into the real estate and then beyond that we still have to fill the value gap. So we’ll use a reasonable rate of return; we try to get it an understanding of risk tolerance of the business owner and clearly somebody who’s in there 60’s is probably going to be less tolerant. They’re going to want to preserve more of their principal. It’s going to make it a little bit more difficult because they’re going to probably achieve a lower rate of return, which in turn creates the need for a higher base of liquid assets.

So that, again, that’s something that’s very critical and that they have to understand what the lifestyle is, what the decision-making process, and often times it’s hard to do because they may not leave the business for another ten or 15 years, but that’s just another argument for starting a plan now because you’ve created the basis for transferring the business and, again, we can refer back to the time issue.

Timing can be your best friend or your worst enemy and in situations where you’ve made a plan early enough, it should be able to – time will give you the opportunity to make adjustments and changes as lifestyle changes come about.

Noah Rosenfarb: And in conjunction with that, you know I think a lot of clients are looking to minimize their tax exposure, you know, before retirement and after. So what are your wealthiest clients doing to avoid paying taxes, you know, legally?

Joe Bazzano: Well oddly enough the only good thing about today’s tax climate is the ability to transfer sizable amounts of wealth at discounted prices. And discounts can be identified in two ways. Well first there’s the market discount, which is the company values are low due to the stagnant economy. Secondly, there’s valuation discounts that can be applied to transfers that will help reduce the transferred value even more.

Now this can be a good way to hedge against future appreciation and the state taxes. And then there’s also the ability to use trusts and those are good strategies to transfer wealth and reduce taxes. Now it’s important to also note that a lot of these strategies are being targeted by the current administration, which may cause a lot of these strategies to become obsolete.

So I think it’s important to understand, you know, stay tuned in the taxes within the coming year. Hopefully the audiences is aware of the impending tax cliff as Mr. Bernanke calls it. You know, on January 1, 2013, tax rates are going to revert back to 2001 rates and new taxes will be added including the 3.8 percent Medicare tax on investment income. So that’s going to come into play with business owners transferring their businesses on top of the regular tax rates there’s going to be an additional 3.8 percent tax on top of it. So it’s, again, it’s important to identify tax saving opportunities, tax saving strategies and I think I mentioned a little bit on the earlier part of this interview on the 1202 Gain Exclusions, the 338. Some complex issues but nevertheless things that need to be – business owners need to know that if not so much the name of them that these options are out there and that they should be testing their advisors on some different solutions or alternatives when it comes to transferring their business.

Noah Rosenfarb: So Joe maybe you could share with us some success stories and maybe some not so success stories that you were aware of by talking about owners making difficult decisions. You know, one of the things that I found is that there is a lot of reluctance to implement once people have the education and a lot of the reluctance relates to family or business partners or outside influences.

Oftentimes owners have to be courageous and visionary in order to maybe take some risks in the short term that should pay off in the long term. And I think some owners do it and some owners don’t. Maybe you could talk a little bit about that and some experiences that you’ve had or things you’ve seen along the way.

Joe Bazzano: Yeah. Unfortunately, there’s a lot of those cases where the lack of making a decision created some problems and typically life-altering situations are good motivators. Just to give you an example, as part of our planning process, we always review the buy-sell agreement and tried to identify any deficiencies.

Now the major points we look at are the triggering events, the definition of value that’s used in the buy-sell agreement, how the buy-out is to be structured, and whether the buy-out is funded with life insurance. This is a great tool, cheap term life insurance is a great tool to fund a buy-sell agreements. Usually very economical compared to the alternative.

Well, when – on one of my exit planning clients, when I delivered the plan, we made as one of our suggestions the need to fund the buy-sell agreement with life insurance. My recommendation was to get this done within one to three months; in other words, get this thing moving right away. I think you know where this is going. Several months later one of the partners was diagnosed with pancreatic cancer and passed away shortly thereafter.

In another case, this tragedy occurred was a long-time client of mine where I had insisting that they take the necessary steps to fund the buy-sell agreement as well as doing some estate planning. And this case the family owned large manufacturing companies.

They were owned primarily by the father and mother but there were five children that held a minority interest in the business. Well two years ago one of the sons had a sudden heart attack and passed away. Now to make matters worse, 18 months after that, a second son passed away. So now the buy-sell agreement calls for the company to acquire the stock from the estate, which now has to come from operations, which is going to hinder operating growth. Now, these instances are tragic and bad enough, but to make matters worse the widows have a perceived notion of what they think the value of the company is and are progressing towards litigation to try and get even more dollars than the buy-out.

I mean, it’s unfortunate but these issues arise all too often. That’s why it’s imperative that these issues get buttoned down sooner than later and one caveat is that just because it’s family doesn’t mean that anyone is immune to this. It could happen to any one of our audiences that have family members involved in the business.

I’ve seen just as many lawsuits between family members as I have from non-family members.

Noah Rosenfarb: Unfortunately, my experience is the same.

Joe Bazzano: Yeah. It happens, and a lot of times family litigation is worse than non-family litigation because the family members know the other party all too well and they know all the circumstances that are involved, which makes it even more difficult.

Noah Rosenfarb: So maybe in spite of those, you know, two kind of significant yet terrible stories, how about some positive stories. What about some people that did some things right that maybe took the action that they needed to take, had the courage, and saw the fruits of their results?

Joe Bazzano: Yeah. Well I think business owners make difficult decisions every day and they make these decisions not only to better their own lives, but I think many business owners realize that their business – there’s many other individuals that are dependent on their business, many of the employees are dependent on their jobs to support their family’s as well.

The goose – the business is the goose that lays the golden egg and it needs to be protected. But I can share a story about a former client of mine who started a distribution company out of the back of his pickup truck. Now this particular owner understood how important his people were to the success of the organization.

As the business grew, he created a culture that fostered loyalty and hard work within his business. I mean, listen to some of the things that he created. He provided nap rooms, exercise facilities. He had a “bring your dog to work” day and just many other benefits that created such a dynamic environment.

Well because of that culture the loyalty that the employees had towards the business also grew, which ultimately caused the business to grow. Well the business grew so much that several years ago the company was sold to a public company for nine figures. That’s hundreds of millions of dollars. And by the way, once the company was sold this particular owner handed out several seven-figure bonus checks to his teams. So this is truly a success story.

Noah Rosenfarb: That’s a great success story and that’s the American dream, right?

Joe Bazzano: Yes, it is. Yep.

Noah Rosenfarb: So what else would you like to share with our listeners about exit planning and your experience and the advice you might want them to impart with from this interview?

Joe Bazzano: Well I think it’s, again, education. Even if you’re not ready to exit your business within the next year or five years and maybe even ten years, I think it’s critical that you become educated and understand of the obstacles that are going to be confronting you in the process, make a plan early so that you can make some modifications because life is not stagnant; life changes. And by planning early you have the ability to make those changes, to meet the changing demands of life.

And just make sure that your exit is based on your goals, not your advisor’s goals. That’s very critical because many times certain advisors will try to steer you towards a transaction that is not ready, that is not the proper solution for you. And then just once you’ve got all your information make an educated decision and just go for it with the understanding that what you’ve done is the right thing and that it’s going to work for you.

Noah Rosenfarb: Great. Well Joe, thanks so much for your time today. Maybe you could share with the listeners how they could get in contact with you, in addition to having it on the – we’ll have it on our blog and website if they want to take a look there, but if they’ve got a pen and they want to jot it down, what’s the best way to get in touch with you?

Joe Bazzano: Sure. You could call me at my office – (860) 756-0929. Alternatively, you can e-mail me at [email protected]. You can contact me – we provide a lot of workshops and seminars for business owners who want to become educated in this process and I’d certainly be happy to share with you some dates and some locations where we’re offering some of these seminars.

Noah Rosenfarb: Great. Well, thanks so much, Joe. Thanks to our listeners and we’ll see you again on another great podcast from the Divestopedia Exit Strategy Podcast.

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Written by Noah Rosenfarb

Noah Rosenfarb
Noah Rosenfarb, CPA/ABV/PFS has devoted his career to advising business owners on all things related to money. He is a Personal CFO and Holistic Wealth Coach at Freedom Business Advisors, which provides middle market business owners guidance on how to successfully transition out of the management and or ownership of their company. Mr. Rosenfarb is the author of EXIT: Healthy, Wealthy and Wise.

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