Episode 16 - Maximizing Your Business Exit: Retirement Planning for Small Business Owners
Unlock the secrets to a seamless business exit strategy that secures your financial future, as we journey through the pivotal steps of detaching from a business you've nurtured. With my expertise in tax compliance and succession planning, alongside insights from the Exit Planning Institute, this episode arms you with the essential knowledge to gracefully navigate the intersection of retirement and the sale of your small business. From the emotional complexities tied to parting with your enterprise to actionable tactics for aligning your fiscal ambitions with the realities of the market, I've got you covered.
Prepare to empower yourself with a skill set designed to mitigate tax repercussions and enhance your quality of life, while also understanding the critical role of a value advisor in steering your strategy. Whether you're close to retirement or seeking to align your business with your family's financial dreams, this discussion is tailored to help you step confidently into your next chapter with a team of experts guiding the way.
Episode Highlights
(07:31 - 09:07) Building a Team for Business Success
(13:11 - 14:20) Life After Exit
(15:57 - 17:51) Maximizing Sale Proceeds Through Financial Planning
(21:22 - 22:24) Roles in Exit Planning Team
(25:14 - 26:36) Financial Planning for Business Exit
Resources
Certified Exit Planning Advisor (CEPA)
Walking to Destiny by Chris Snider
Traction by Gino Wickman
Family Business Consulting Group
Connect with Deb
Website: WorthyNest.com/podcast
Email deeper dive questions to podcast@worthynest.com
Full transcript
Hello and welcome to the Beyond Budgets® podcast. I'm your host Deb Meyer, a Certified Financial PlannerTM, award-winning author of Redefining Family Wealth, and mom of three.
Deb Meyer (00:01.646)
Did you know that 75 % of small business owners who want to sell, only 20 % of them actually sell their business? And of those 20 % who sold, about three quarters of them profoundly regretted the decision within a year after the sale? Hi, I'm your host Deb Meyer of Beyond Budgets®, episode 16, where we're gonna dive into exit planning for small business owners.
We talked about retirement planning pretty broadly in episode 14 of Beyond Budgets®, regardless of your profession, but this one is specifically geared towards small business owners. If you're not an entrepreneur, that's okay, but if you know one, please go ahead and forward this to them, especially if they're contemplating retirement, even if it's 10 years out. Many of the principles in this episode are going to be good for any small business owner, even if they don't have retirement on their brain, especially if they're looking to align their business and family financial goals.
So a little bit about my background in exit planning and why I started getting interested in it. When I first started my career, it was at Deloitte Tax, and I spent about two years there just working on tax compliance for some small, closely held businesses, privately owned businesses, actually a pretty significant grocery store chain where I used to live.
And I worked on the partnership tax returns and S -corp tax returns and then the individual tax returns of the family members that had the ownership interest. Then when I left Deloitte, I worked at a multi-family office for about seven years and continued working with a lot of small business owners there, helping with some of the succession planning and making sure they were in a good spot from a family financial standpoint if in fact they did sell their business.
Then when I left the family office, I was a stay-at-home mom for a couple of months, realized that was not my calling. I love my boys dearly, but I missed the professional stimulation and wanted to get back into a role where I could help support clients.
Deb Meyer (02:22.19)
When I decided to kind of branch out on my own, become an entrepreneur, it was really accidental. I ended up launching an accounting practice based on a referral from one of my family office clients. It was a hotel that was getting developed and this particular former client that had referred me said, “hey, they really need a good virtual CFO to help organize the finances of these hotels.”
Fast forward to 2020, I had a client that owns some pizza franchise businesses. And at that time, he said, you know, I'm looking to retire within the next couple of years. I don't really know what to be thinking about when it comes to selling my business and if I should be thinking about selling it to my kids or to an outside party, maybe someone that's been a long time manager within the store that I can have them buy me out essentially.
It was really a pivotal moment for me as a planner because I didn't have any experience directly helping with the sales. And I'm a lifelong learner, that's my top strength.
When I decided to try to become more knowledgeable on the subject, I sought out the Exit Planning Institute. And that's where I'm getting the framework for today's episode. Anything I've learned in the exit planning arena has come directly from EPI or Exit Planning Institute. And more specifically, I got their CEPA designation, which is Certified Exit Planning Advisor, back in fall of 2020.
Again, this is going to be a high-level overview of some of the concepts that I've learned in EPI and as, you know, when I became a CEPA, but I do want to share just some cool takeaways as well, mix in some more relevant stuff that I've learned recently. I just attended the Exit Planning Institute's annual summit, and was honored to speak as a Women in Exit Planning symposium speaker and then also was featured as part of their author showcase.
It was a really exciting event. I had done virtual stuff up until that point and then I went in person for this back in late April. So I have a lot of great nuggets to share and want to make sure you feel a little more empowered in your decision making if you are a small business owner thinking about retirement because the planning issues are a little bit different.
For someone that's been in a long time career in a traditional W -2 role, yes, they have a lot of their identity tied in that W -2 role if they've been there for a long time. But you more so just starting a business from scratch or if it's a family business and was passed down to you, either way there's a deeper level of engagement in that business when you have an ownership stake. So...
It really can be much more difficult emotionally to detach yourself from the business. And there are some important considerations you need to think about above and beyond just the traditional retirement planning.
And if at any time you want a deeper dive of a particular topic that I'm going to provide an overview of today, please go ahead and email me. It's at podcast podcast at worthynest .com. That's podcast at W -O -R -T -H -Y -N -E -S -T .com.
All right, so let's talk about the value acceleration methodology. Again, this is from the Exit Planning Institute. To give a little bit of background about EPI or Exit Planning Institute, Chris Schneider was the original owner of it. He brought his son, Scott Schneider, into the business early on with him, and he wrote the book called Walking to Destiny. So if you are a small business owner,
Deb Meyer (06:40.174)
interested in learning more about this and want to read a great book that covers the gamut of exit planning, I would highly encourage you to get Walking to Destiny by Krishnader. Walking to Destiny was released several years ago and then they just recently did a second edition. So, highly recommend either one, but if you want something a little more recent and relevant, the second edition would be great.
One of the key takeaways I got from the summit is that the worst time to sell your business is when you're feeling like you absolutely need to sell now. So usually you get to a breaking point, right? If you're burnt out, if you're really struggling with something, you're in a poor mental state in terms of you just want out. You can't take it anymore. It's just too painful. That's not a great time to be selling because obviously something is wrong.
there's something that's broken either on the business side or some event that's coming up from a personal standpoint that you feel a sense of urgency to sell. So ideally, you're going to be planning ahead for an exit. You're going to be putting a process into place three years in advance minimum to try and maximize the value of the business when you sell it. And one of the key things, especially with...
micro businesses, so really small businesses, would be to make sure it's not dependent on the owner. I am speaking as a owner myself of Worthy Nest, and I know how hard that can be if you haven't had a mindset of building out a team. One of the challenges when you're thinking about selling is just knowing that, okay,
If you are the sole owner, if you haven't involved other people in your business much, and you've just been running the show independently for many, many years, it can be very hard to transfer that value, even if the name of the business has nothing to do with your personal name. On the other hand, for people that know from day one they want to build out a team, they have much more successful exits.
Deb Meyer (09:00.654)
because they've already put the people and processes in the place to maximize the value of their business and get top dollar. So when I gave those statistics earlier about people wanting to sell and the amounts that actually do sell, number one, it can be hard to find the right buyer. But number two, if the business is so dependent on you, the likelihood of the client staying is going to be very small.
And again, most service -based businesses run into this problem more than product -based businesses. Typically, product -based businesses, you have to have more support, more infrastructure, and those are a little bit easier to think about sale because you might already have a management team in place and some of these other items. So even the most successful exits can be challenging because there's a lot of moving parts. And...
When you think about the three facets of it, or as EPI likes to call it, three legs of the stool, there's the business side. We'll dive into that a little bit more. There's also the personal goals that you're trying to accomplish, making sure there's some work -life balance there. And then the financial goals to ensure a, quote unquote, healthy retirement when you do exit. So on the business side, the people and processes are kind of the two core drivers.
or forms of intangible capital. There's technically four forms. I'm going to focus on people and processes in today's episode. On the people side though, it's really important to create a culture where people can excel. And if you find yourself in a position where there's high turnover or key employees tend to move on pretty quickly, don't really take ownership in...
their roles or responsibilities, it can be challenging if you feel like you're the only one working towards this growth as a business. So establishing that culture where people want to come to work is really important. And that doesn't matter what size business you are. If you're a team of three or a multi -billion dollar company,
Deb Meyer (11:24.782)
you know, on the Fortune 500 list. So at any point in the organization, if you're promoting a culture where people don't feel comfortable to show up for work and put forth their best attitude, it can be really challenging to grow as a business. On the opposite side, if you have the right people in place, if you feel comfortable with creating a culture where people feel welcome and valued, it's going to be a lot easier to...
not only hire but also retain key people that can help that business grow. And then on the process side, there's a good book called Traction by Gina Wickman that discusses the entrepreneurial operating system. Again, it's suited more towards the larger businesses, but if you own a business where there's some potential there to have different layers of management and you're really building out a larger.
team, I think that can be a valuable book to at least start with. And then at the Exit Planning Summit, I even met some EOS implementers who can take the ideas from the book and then really hold you accountable to them in more of an ongoing coaching format. So happy to connect you if that's something of interest. But the book traction is a good starting point to at least understand the entrepreneurial operating system. And then
The key with any of this is decentralizing the owner. So the business can run independently of you and isn't reliant on you being working, you know, week in, week out every week for full time or more. All right. From a personal standpoint, I think it's important to focus on self -care and then work -life boundaries. Because when you're working in the business, you tend to...
focus exclusively on the business. Yes, there might be seasons where you have to do some personal, take care of some personal matters, but at least with the exit planning summit when they were bringing small business owners in and asking open -ended questions, that was kind of the number one struggle for a lot of small business owners was having that kind of work -life balance and not letting work overtake some of the personal.
Deb Meyer (13:48.142)
that they want to experience with their families and including travel, you know, vacations. So for a lot of small business owners, that business can feel like your baby. You started this thing, you're helping it grow, you're nurturing it, you're giving it, well...
I guess I can't say food and shelter, but you know my point. You're really pouring a lot of energy and attention into cultivating this business and helping it grow. So when you're thinking about a potential exit, you also have to think about what your life's gonna look like after that exit, more so than people that haven't had a business, right? You're not gonna be spending every day.
out on the golf course or out sipping pina coladas on the beach, you're needing to find some other activities that will keep you busy. Because a lot of entrepreneurs, again, I've worked with entrepreneurs over several years now in the accounting practice, and a lot of them have multiple interests. They're very hard workers. A lot of them have the shiny object syndrome where they're wanting to go from one thing to the next.
So if that's you, just understand that doing one thing like golf or travel or whatever is probably not going to be satisfying for very long. So figuring out what some varied interests are, what some maybe exploring volunteer opportunities. Or for a lot of business owners, they actually take the money that they raise in a business sale and might pour it into a new business endeavor. They may not want to fully...
you know, disengage from work, they might want to try something different. I was just speaking with a kind of serial entrepreneur the other day who doesn't have a background in this, but said, hey, I really want to build a platform for technology for caregiving needs and a really cool conversation with him. But it was just an exciting extension of something. He had been in unrelated businesses before then and still wanted to use his skill set, had some successful exits.
Deb Meyer (16:03.886)
and wanted to use that new skill set to craft a new business.
When I was sitting there in the audience attending the exit planning summit recently, it was heartbreaking for me when I heard there was this young female CEO who had built this wonderful brand. And then right after her business sale, she fell into pretty sad, deep depression for several months. And it took a lot to get out of that.
So she hadn't thought much about what that life looked like post -exit and that's the only reason I'm bringing it up for you is it can really be an emotional traumatic time, you know, after the initial, yay, I have all this money. It can be a very emotional and traumatic time if you don't have plans for what you're going to do afterwards.
And then for a lot of small business owners, who are especially on the younger side like Gen X or millennials, they do look at those new business ideas post-exit. So just figuring out a strategy for what could be what financial resources you want to keep available for that versus the financial resources you want to add to kind of the long -term family finance bucket.
And then the third leg of this tool is financial. A lot of people have most of their wealth tied up in the business. It's considered an illiquid asset until you sell it. So there's always some tax implications to understand. You might have your gross sales price, but there will alway be tax implications on the sale, especially depending on how you structure the sale. For a lot of people, the ideal would be, hey, if we can get as much possible.
Deb Meyer (17:56.142)
in cash right away on the sale. That's fantastic. But from a capital gain standpoint, you could be triggering a slightly higher tax rate if you're over a particular threshold. But in that situation, like I just had a client sell his marketing business recently. And with that transaction, he got all of the proceeds upfront. There was no earn out, you know, for making sure that the client stayed on with the new company at a later date. But in his case, the tax bill was a little bit higher because he got it all in year one.
Now, for a lot of transactions, they might say, hey, we'll give you 50 % as an upfront payment. And then you have this earn out where the clients that are retained in the post transaction, those that will continue to support paying you. But if they leave after a year or whatever the timeline is, then it's going to be more difficult for you to get paid that other half. So again, anything you can do to make sure from a financial standpoint, you're planning for not only the gross amount, but really the net amount after tax is going to be helpful as you're crafting your personal financial plan. And ensuring retirement security for your family.
Now, the other things to be kind of thinking about before a sale, and this would be at least a couple of years prior to sale, before you would even enter into a contract, if you do have charitable intent, there was a good section in the Exit Planning Summit just talking about doing some gifts of the business interest to a charitable organization or to a donor -advised fund prior to the sale and then that way you're also helping on the tax side even while you're still earning an income from the business.
I'm not gonna go into deep complex example here, but I will say there were some really good savings and ended up with more money in the pocket of the charity, more money in the pocket of the owner, the primary owner and fewer taxes paid.
There are some techniques to use there, especially if you have some philanthropic intent. And then also be thinking about family goals around education. So if you're younger and selling the business, what kind of funding do you want to have for your kids in terms of college or private schooling? And then if you're a little more experienced in life and have grandkids, would you want to be setting up 529 plans, for example, for some of those grandkids?
using the business sale proceeds. The other thing to be thinking about is lifestyle needs post-retirement, post exit. So kind of figuring out what your typical living expenses are now and assuming they're going to stay relatively similar, that's great. But for a lot of people, they're going to want to spend a little bit more once they don't have that grueling job day in, day out. So...
that you might be wanting to take more travel and that comes at a price tag. So figuring out what some of those kind of base lifestyle needs are and then what some of the extra costs might be. And then the other thing to consider would be where you're going to live post-exit. A lot of small business owners will build a business in their local communities, stay there for 30, 40 years, but maybe they've always yearned to go to a different state and experience different weather.
be closer to other family members, whatever the case may be. So just thinking about the cost of living in that particular state that you want to be moving to post -exit, if you plan to move, that's another important consideration.
On any of these financial goals, really getting a wealth manager or a holistic financial planner to help walk through the different scenarios with you is going to be extremely important. And that's regardless of the size of the business or the proposed sale amount. So for me, that's really my area of expertise. That's my passion. I really love helping clients kind of craft future plans and project out what things are going to look like from a retirement plan perspective. So happy to have any kind of consult or further discussion if that's something of interest to you.
You can go to my website, it's www.worthynest.com and there's a Contact Us button in the top right hand corner.
All right. Let's take a little break too. On the website as well, there's a starter guide and that's basically just helping your family bus through any of the top 10 financial myths.
It's not geared specifically towards business owners at this point, but it is a really helpful resource if you have kids, especially if you have a younger family. It's at www .worthynest.com/wn-starter-guide. That's www .worthynest.com/wn-starter-guide.
All right, so let's talk about the roles within an exit planning team. At the very center of that team is gonna be the CEO or the owner. And then typically, again, this is gonna depend on the size of the business. If you're talking about a fairly large business with multiple employees, you're gonna have probably more people at the table on the exit planning team.
Now, if you're a smaller business, it's going to be a little more challenging to pay the bills of these different consultants if you're hiring multiple people. Right now, there's a total of eight, including you as the CEO or owner, that could be on the exit planning team. So I would say, regardless, kind of the right -hand person should be a value advisor, someone that's been through the exit planning network.
Deb Meyer (24:41.806)
methodology and understands the principles of exit planning. They're also known as the growth consultant. So they're going to be helping try to maximize the value of the business before you go to sell it. Another important person in that process is a CPA. They're going to be assisting with financials during the due diligence process and then also modeling out what those tax implications may look like post exit.
And from a wealth manager standpoint, that's another important seat to have at the table. They're going to be really focused on crafting those family financial goals or individual financial goals if you're not a parent. An attorney will be helping with the transaction itself. And you may also have a state planning attorney involved just to help craft some of that.
The estate planning piece could come at a later time, but especially if you're trying to do some of the charitable philanthropic intent or transition any of it to family members, it's going to be important to have someone who's familiar with estate planning as well. And then for some of the larger transactions, again, maybe having a separate business broker or an &A advisor.
investment bank, any one of those, it's really going to depend on the size of the business. So &A advisors, investment banks, they're usually interested in transactions that are $50 million and up. You might find some &A advisors that are willing to work with business that will sell for $20 million and up. But again, for the large majority of small businesses, you're not going to be, if you're a pretty micro business where you have a very small team or...
it's just you, the likelihood of the multiples in business sale price are going to be quite a bit smaller than that 20 million mark. So again, just trying to be cognizant of where you're at in that spectrum. That's an important distinction when you're trying to craft the exit planning team. And then in insurance, a risk management specialist would be another important component, especially if there are buy-sell agreements on key persons.
And then a family advisor could be another, like a liaison when you're talking about a larger business, especially if it's a multi-generational family business and there are lots of idiosyncrasies with that family. I got to be on a panel with Amy Wirtz of the Family Business Consulting Group and that's her main role as being kind of that family advisor both from a business side, but also on the personal side, just being there as a support for family members. And she's also a value advisor or growth consultant in the sense that she's helping make sure everything's driven from a value standpoint.
So ideally, you're going to have a team of all CEPAs who are familiar with that value acceleration methodology and the three legs of the stool that I talked about today. But...
If you can't get that, at the very least, getting one CEPA on your team is going to be really important as you prepare for a transition. A lot of CPAs, a lot of financial planners don't necessarily have this training and they may say they do, but it's important to be kind of interviewing people before you plan to exit just to understand what their real expertise is and if they've been helping in multiple...
realms on these kinds of issues or if this is their first time doing it. So again, larger company, more complexity, typically has more advisors and there's usually a higher cost associated with it. So on those companies, you want to make sure you're engaging in a really deep interview process and you're searching out specialized expertise.
If you want to do an ESOP plan, there's only a couple of advisors nationally that are really deep in that expertise. I know UBS was one of the event sponsors at Exit Planning Institute because they have a very deep bench in ESOPs. So again, I'm not a UBS person. I have my own registered investment advisory firm, but it's important to be thinking about some of these specialized areas if that's your goal and you have a larger company that you're trying to steward.
Deb Meyer (29:26.958)
For smaller companies, it might be helpful to find someone that can fit in multiple roles so you're not paying crazy amounts of money to have them speak on different sections of what this transaction might look like. So in my particular case, I'm a CPA and a Certified Financial PlannerTM, also have that CEPA designation. So I can fill quite a few roles for my clients. And if there are legal documents that need to be drawn, I'm not going to be doing those. I'm going to make sure an attorney gets involved.
But even the transaction I just helped with on my client that sold the marketing business, they just had a business broker that worked alongside the SBA to get a loan for the buyers. And then from just a multiple perspective, they were also helping on the valuation and what the actual sale price was going to be.
I was there as part of the process to help guide on some of the tax implications and I'm planning to hopefully work with the client that sold on some of their personal finances now that they have things cleaned up. But those are the core tenants of being an integral part of that team before the sale.
So in this particular case with my client that sold the marketing firm recently, it was a kind of a quick transaction where the due diligence process was very quick, but it was also within an ownership structure that the buyer and seller already knew each other well prior to the sale. There's all different variances, but we didn't have to have a large exit planning team to prepare for this particular sale.
In larger companies that have 100 employees or more, it is going to be a more thoughtful process, years in the making, of making sure you have the right team members in some of the upper level roles. And you probably will need some of these more specific advisors in each seat and not kind of the one size fits all solution.
I hope that's helpful. All right. That wraps up the overview. I don't want to go into too many details, but I am happy to take any questions. If you want to send them to podcast@worthynest.com, that's going to be the best resource if there's something you want to dive deeper into or just ask for more exit planning guidance. Otherwise, I'm going to go back to more of the broader family financial planning concepts in future episodes. Thanks!