Preparing for the New Year is an excellent time to consider how living out of your business can impact your retirement and/or your lifestyle if you exit your business without proper planning!
The financial benefits of owning a business are much more than generating your own income and building equity. In fact, many owners of private companies personally ‘live out of their business’. Most owners planning a business exit fail to recognize their dependence on these funds and the extent to which they have grown accustomed to this ‘living out of their business’ lifestyle. Measurement of these expense items helps determine how financially ready an exiting owner is for their business exit.
Everything from car payments (and insurance and gas) to meals and entertainment, health insurance, hobbies and travel, and cell phone payments are often being charged to business accounts. Accounting for these items and how they will be paid after the owner exits the business, whether they plan on officially retiring or not, can be more of a challenge than it initially may appear. An exiting owner should, therefore, answer the following question:
“Without the company paying for these expenses, which account is that money going to come from?”
Take the example of Jim, the owner of a successful small business. In addition to his salary and bonuses, he and his family are used to eating out once a week and driving new vehicles. Jim also plays golf 2-3 times per week, and the family takes 1-2 trips per year – all of which are charged to the company’s account. Company vehicles, gas, health and vehicle insurance, meals, and so on – the company pays for them all.
After exiting the business, he maintains the same lifestyle, only now, the company is not paying these expenses – he pays them from his personal savings and investment account. Slowly, he begins to see his investment “nest egg” dwindle, as the passive interest he had budgeted to cover living expenses is not enough to maintain the costs and extras to which he had been accustomed. Jim begins spending the principal of his investment’ nest egg.’ Suddenly, moving into retirement (or the next phase of life) is not as comfortable as Jim had hoped.
It is only when Jim sits down and calculates the money he had been pulling out of the company that he recognizes his mistake and sees that these company ‘perks’ have equaled more of his annual expenses than he initially anticipated. Jim did not make a completely informed decision when determining his exit strategy. Although he was very focused on the business aspects of the transaction, he needed to spend more time on the personal side in measuring the passive income required after the exit.
Many owners are often disappointed when forced to limit their lifestyle choices after selling the business. And why shouldn’t they be? Owners work hard to build successful businesses and work just as hard to sell or transfer that business successfully. Only through adequately and realistically planning for the future can owners ward against a decrease in quality of living and reduce the worrying that accompanies financial uncertainty.
Exiting owners often plan to limit or cut back personal spending after exiting the business. The truth, however, is that as with any other retiree or person with an extra 40 or more hours per week free, you will be looking for ways to fill that time. Whether starting a new business, golfing, traveling, funding a hobby, or a combination of these, you will likely be left with less money in your wallet than you had budgeted for before exiting the business. An owner must also factor in inflation and rising costs of necessities such as medications, oil and energy, and food when projecting the expense items that are to be paid by passive investment income.
Finding out today how much money you “pull out” of your business on a monthly basis is a crucial component to measuring your financial readiness for an exit and, ultimately, whether or not a successful business exit is possible. As with all other successful business exit strategy components, this potential financial crisis can be averted with proper planning, budgeting, and experienced advice from your exit strategy advisory team.
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