In the first article of this series on Your Last Five Years, we examined why five years is the tipping point when owners must start formally planning their exit. Click here to review that article now.
In Part 1 of this series, we looked at the five questions owners need to answer once they reach the critical five-year tipping point, and explored the first question, which is “What is My Likely Exit Strategy?” Click here to review that article now.
You, as a business owner, must answer five critical questions once you reach five years before your desired exit. These five questions define your exit goals and help shape the plan for how you will achieve those goals. As stated in previous articles in this series, there’s no way to sugar-coat this—answering these five questions must happen as you enter Your Last Five Years. Without clear answers, you will not know the steps needed for your exit planning, and you potentially run out of time to maximize your exit success.
The five questions are:
|Part 1 – What is My Likely Exit Strategy?|
|Part 2 – How Much Do I Need to Net From My Exit?|
|Part 3 – What Do I Want My Legacy to Be?|
|Part 4 – What Do I Want To Do in Life After Exit?|
|Part 5 – How Exitable is My Company?|
Question 2: “How Much Do I Need to Net From My Exit?”
The top goal most business owners desire to achieve at exit is to reach financial freedom. While everybody’s economic situation is different, practically all owners share the same definition of financial freedom—having enough personal wealth so that work becomes a choice and not a necessity. (Money does not buy happiness, but in our experiences, most owners who reach financial freedom are typically smiling, so there is something important happening here.) Therefore, to answer how much you need to net from your exit, we need to know how much you need to reach financial freedom.
Unfortunately, we have observed that most owners do not know how to identify the right amount they need at exit to reach their desired financial freedom. It’s not the same thing as knowing what your business may be worth or knowing the balance of your current investment and/or real estate portfolio. Those numbers are what you have. We need to know how much you still need. We have also observed that owners who believe they know how much they need typically underestimate the amount. Why? Most financial analysis is done based on the owner’s personal spending to support the desired lifestyle. But business owners have personal lifestyles heavily subsidized by the business checkbook. Some to all of the following may be paid for you by your company: cell phones and service plans, laptop computers, cars and associated monthly expenses, meals, business travel that doubles as personal trips, club dues, and insurance and benefits. These business expenses will become personal expenses upon your exit. Too often these expenses are overlooked or underestimated.
To help owners accurately determine how much they need to net at exit, we devised the Exit Magic Number™ calculation. This analysis does not look at how much you have, but rather how much you need to reach financial freedom. It’s the most important number a business owner needs to know. Click here to access our free eBook on the Exit Magic Number™ and other related resources.
Last, why is knowing this number critical when you reach Your Last Five Years? Because with only five years left before you desire to exit, it’s imperative to know now if you are on track to reach financial freedom, or not. If you are not on track, meaning if you are coming up short at this time, better to know that now when you have time to adjust your plan or goals. If you are on track, or even better if you have a surplus, knowing that now is just as important. A surplus may permit you to exit sooner, or consider some aggressive tax planning tactics, or perhaps more share ownership with your employees. If you don’t know your Exit Magic Number™ until shortly before your exit—or even worse until after you have already exited—it becomes too late to act.
In the next article in this series, we will examine the third question you must answer when entering Your Last Five Years: “What Do I Want My Legacy to Be?”