Once the personal, financial and business exit planning goals have been clearly identified, the next ingredient involves determining the business owner’s financial needs upon exit. In other words, what lump-sum amount is required upon exiting the business (including from the sale of the business) to enable the business owner to achieve the goals defined under Step 1?

A certified financial planner (CFP) can assist with this aspect of the exit plan. Financial planners have access to financial models that help project the amount required based on various underlying assumptions. Future projections are inherently uncertain. As a result, it is useful to consider different scenarios (e.g., best case scenario, worst case scenario) by altering one or more of the key underlying assumptions. Some of the underlying assumptions to be considered in this regard include:

  1. Annual spending and expenses upon exit/retirement (e.g., living expenses, travel, donations, family support, etc.);
  2. Amount of other post-retirement income expected (e.g., employment, consulting, investment, etc.);
  3. Value of the other non-business assets (e.g., marketable securities, real estate, insurance, etc.);
  4. Life expectancy and mortality factors; and
  5. Anticipated rates of return, income tax rates and inflation rates.
The projected lump-sum amount required upon exit is then compared to the business owner’s current situation to identify any gaps or shortfalls. This sets the stage for determining action plans to close these gaps, which is dealt with later in the exit planning process.

The financial needs assessment should also include a more comprehensive financial plan to better manage and protect the business owner’s wealth going forward, in accordance with the stated goals. Some important questions to be addressed include:

  1. Is there a current will and power of attorney?
  2. What estate planning can be done to help protect assets and minimize taxes (e.g., estate freeze, family trust, etc.)?
  3. What insurance (type and coverage) is required to help protect the business, the business owner and his/her family (e.g., life, disability, critical illness, key person, buy/sell clause)?
  4. Can corporate-owned life insurance be used as an investment vehicle to help maximize returns?
In addition to the financial planner, certain other professionals should be consulted for their experience and expertise relating to these questions, including:
  1. Lawyer (wills & trusts, tax & estate) - draft wills, assist with tax and estate planning
  2. Tax accountant - assist with tax and estate planning
  3. Insurance professional - ensure appropriate and adequate insurance is in place to meet goals
  4. Business valuator - business share valuation for tax and estate planning or for benchmarking purposes.
The specific role of a business valuator for benchmarking purposes will be discussed more next week under my article "The Third Ingredient to a Successful Exit - Valuation."