If you've been reading this series, you'll know there are only two more questions to be answered by business owners in their pursuit of a successful Exit Plan.
As a quick refresher, here are the six critical questions from the “All We Want Are the Facts” Exit Planning Questionnaire:
- What amount of annual, pre-tax post-exit income will you need after you exit?
- What is the joint life expectancy of you and your spouse?
- What is an appropriate withdrawal rate from your post-exit investment portfolio?
- What is your business worth?
- At what rate do you expect your cash flow and business value to grow?
- What will the net proceeds be from the sale of your business?
In this post, we’ll address Question 5.
Question 5. At what rate do you expect your cash flow and business value to grow?
“I predict that the value of my business will grow at the rate of _______% per year beginning this year. I predict cash flow will increase during the same period by ________% per year.”
Common Assumptions: Business owners tend to be far, far too optimistic about projecting future growth. While this optimism is the driving force behind starting a business, it can cut owners’ efforts to exit at the knees. So, owners need to ask, “Does my estimate of business growth exceed its historical rate? Do the facts support my estimate?” It’s likely that many owners’ initial estimates will be inaccurate.
All We Want Are the Facts: Business owners should base their estimates of future growth on actual past growth rates and amounts. If an owner projects future growth that exceeds historical growth, that owner must document why cash flow, revenues, and profitability will exceed historical patterns and by how much.
Sources of Accurate Information: A CPA or business consultant should advise the business owner in projecting future growth. Additionally, owners should monitor and adjust the CPA or business consultant’s projections over time. An essential part of most Exit Plans is the development and refinement of written growth plans. Current plans and, most importantly, future growth plans are modified regularly based on actual experience.
In my next post, we will finish our series on “All We Want Are the Facts” Exit Planning by answering Question 6, “What will the net proceeds be from the sale of your business?”