You may remember from high school algebra something along the lines of; solve the following for x. Solve for x means finding the value of x that would make the equation true. For example, x+1=3. If you were asked to solve the equation, then you would need to determine the value for x. Well it must be two, since 2 + 1 = 3, x = 2. With a simple equation like this it was possible to just think briefly about it and get the answer. The more complicated the equation gets, the more work is involved.
Solving for x in determining the proceeds necessary from the sale or transfer of a business, where x is the amount of net proceeds needed for an investment portfolio to provide financial security for life, is a much more complicated calculation.
How would you go about solving the following equation?
x+y (y investable assets owned outside the business) = (financial security)
x is the investable proceeds necessary from the sale or transfer of your business, when added to y equals financial security.
Unlike the simple equation in the first paragraph, solving for x here is much more complicated. First, you need to understand the value of your business through a professional valuation. In calculating the value of x, you must consider the net proceeds from the sale of your business. Taxes, long term debt, escrows and holdbacks, professional fees, as well as working capital adjustments will be deducted from sale proceeds. The value of your company, less these deductions is what is available for investment. In this equation we are trying to solve for x, which when added to y, must equal financial security post business exit.
If the net proceeds from the sale of your business (x) are not sufficient when added to your current investable assets (y) to equal financial security, then you have a value gap in your business. This gap must be addressed early so you have enough time to increase the value of your business. If left unaddressed the value gap will mean accepting a different lifestyle post exit or working longer.
If solving for x, as it relates to your financial security were as simple as x+1=3, it would be very easily solved alone. With something as complex as solving for x when your financial security is involved, then seeking advice from a team of qualified advisors becomes very important. A qualified business and financial advisor, along with a CPA and attorney are all critical to you successfully solving for x.
A business advisor is going to work with you well in advance of an ownership transition event to maximize the value of your company. Your financial advisor will advise on determining if your current investable assets, along with the net proceeds from your business exit are sufficient to build an investment portfolio to provide financial security for life. They will also assist with setting realistic assumptions of life expectancy for you and your spouse, investment portfolio returns, withdrawal rates and inflation. A CPA and attorney are critical in making sure the ownership transfer is done in the most tax efficient way and the terms of the sale the most advantageous to you. Both your financial advisor and attorney can address estate planning issues.
Advisors have a fiduciary duty to their client, which means they should avoid all conflicts of interest when advising you. Working with the right advisors will help in solving for x, even with the most complex equations.
Chuck Owston, Florida Capital Advisors