Transitioning Business Owners Need a Realistic Financial Plan


from Jane Johnson of BTA on Mon, Oct 01, 2018 @ 09:01 PM 

As a business owner, no matter what you want your legacy to be after your business transition, you want to ensure that you have enough retirement income. In a recent article, we discuss why it is so important for you to:

  1. Take stock of the assets you have saved outside your business (your Net Worth),
  2. Determine how much income you’ll need post-transition, and
  3. Calculate how much money you’ll need to net from your transition (your Wealth Gap) to fund the rest of your life.

This process is crucial for owners because their businesses are usually their largest assets. In fact, it’s not unusual for some owners to have as much as 80% or 90% of their net worth tied up in this illiquid investment! And, prior to any sale or ownership transfer, you need to determine just how financially reliant you will be on the transition proceeds. Taking the time to create a financial plan as part of your overall Business Ownership Transition Plan (BOTP) will help to set you up for the retirement you deserve.

Let’s look at what you’ll need to consider as you develop your personal financial plan.

Developing a Realistic Financial Plan Is Essential for Transitioning Business Owners

When we start our planning process with transitioning owners, they are often surprised to learn that their existing financial plans are not adequate for their post-transition needs.

During the typical financial planning process, an assumed value for the business is often plugged in along with various other assumptions such as weddings and college expenses, how long an owner’s spouse will work, social security income, tax rates, etc. This is dangerous if the business value is not based on real market data and the owner doesn’t know how or when they may extract the value of the business.

The most significant figure owners need to determine is the ESTIMATED NET PROCEEDS of the business transfer, after taxes and fees. Owners should work with a financial advisor who is trained to assist business owners with developing a financial plan that determines just how much net proceeds they will need from the business transfer in an ideal timeframe. This should then be compared back to the owner’s Wealth Gap and if the net proceeds are not enough, an owner will need to take steps to close the gap such as saving more money outside the business and/or increasing business value.

Most financial advisors have access to powerful planning software that can be used to determine how much is needed from the business transition. Most of these software packages use the owner’s current net worth and projected income, expenses, and savings along with some assumptions for annual rates of return, tax rates, and inflation in order to calculate the probability of achieving their retirement goals. If the business value is left out of the plan, your advisor may be able to tell you how much you need to net from your business sale. But let’s not forget about taxes and fees!

It will be very important for owners to work with their CPA in order to determine an estimated tax and fee rate that can then be used to “back into” the gross selling price needed. It sounds complicated, but it’s not that difficult to do and it will inform owners about just how much their business needs to be worth in order to achieve their financial goals post-transition.

Owners should also consider working with a knowledgeable business intermediary (broker or investment banker depending upon the size of the business) in order to determine the market value of their businesses today and what buyers are looking for. It’s not just about growing the numbers but also about improving the overall quality of their businesses. This is powerful information as owners plan for business growth.

Diversification is Always a Good Idea

It’s helpful to think of your net worth, including your business, as you would any other financial portfolio – you don’t want all your eggs in one basket! Diversification is the key to minimizing risk and generating the best possible returns. This means developing a plan to consistently save money OUTSIDE the business, including finding tax-efficient ways to save beyond the traditional retirement plan. Work with your financial advisor to set a course for regular savings and good returns with your transition timeline in mind.

Start Now

Your personal financial plan should be developed as part of your overall Business Ownership Transition Plan, and it should be reviewed and updated regularly as your lifestyle changes. Your business transition and financial advisors can help you analyze your current situation, take into account all of the nuances associated with the sale of your business, determine your financial needs for the future, and develop a comprehensive plan to achieve a successful post-transition retirement.

Start now even if you don’t plan to transition for years so you can reduce your Wealth Gap, increase the value of your business, and minimize taxes. It takes time to develop a BOTP, but it will help ensure that you achieve ALL of your goals!


Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.

Call Colonial Business Brokerage today at (443) 982-7332.