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Richard Fields - Integrated Advisory Services - Winston-Salem, NC

110 Oakwood Drive, Suite 550, Winston-Salem, NC 27103


Successful Exit Planning:  Part #2

Successful Exit Planning: Part #2

| September 29, 2017
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In our last post, we argued that assumption-based Exit Planning was a pointless exercise that generally ends in disaster, preventing owners from exiting their businesses in style. Unless owners can leave their businesses when they want, for the money they need, and to the person they choose, they will probably fail to live the post-business lives they desire and deserve.

In the last post we introduced the six questions business owners need to answer with facts in order to develop their Exit Plan. Then, we addressed how to find the facts around Question #1, the amount of annual, pre-tax post-exit income business owners will need after they exit. Today, we will delve deeper into Question #2 and how to get fact-based answers, which form the foundation of every solid Exit Plan.

As a quick refresher, here are the six critical questions from the “All We Want Are the Facts” Exit Planning Questionnaire:

  1. What amount of annual, pre-tax post-exit income will you need after you exit?
  2. What is the joint life expectancy of you and your spouse?
  3. What is an appropriate withdrawal rate from your post-exit investment portfolio?
  4. What is your business worth?
  5. At what rate do you expect your cash flow and business value to grow?
  6. What will the net proceeds be from the sale of your business?

As we did for the first question, let’s look at the common assumptions owners make when answering the question, and the factual information required to answer it appropriately.

Question 2: What is the joint life expectancy of you and your spouse?

“I estimate my life expectancy (or the joint life expectancy of my spouse and me) to be ________ years.”

Common Assumptions: Many owners figure that they will live about as long as their parents did, on average. This is a dangerously imperfect method, because it flies in the face of facts and statistics, and doesn’t accurately examine how long business owners and their spouses are likely to live.

All We Want Are the Facts: Business owners should base their answers, at a minimum, on general mortality statistics.

Accurate Information Source: Business Owners should use the MetLife Life Expectancy Calculator or any calculator based on the Social Security Period Life Table 2000 to determine their likely life spans based on evidence.

Additionally, consider this information: A husband and wife are both 65-year-old non-smokers who have normal blood pressure. They consume two or fewer alcoholic drinks a day and engage in frequent exercise. Statistically, there is a 50% likelihood of at least one spouse living to age 98 and a 25% chance of one living beyond age 101.

While life span doesn’t necessarily affect how much owners will spend on an annual basis, it does affect how much they will spend over a lifetime and how much capital they will need to fund that total amount. We are suggesting that health care advances and maintaining a healthier lifestyle than the average American will likely extend the business owners’ life spans beyond their expectations. Remember, with increased life span and age come increased expenses.

In the next post, we will examine how to determine an appropriate withdrawal rate from the post-exit investment portfolio.

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