Knowing when to exit is just as important as defining how and why.
We all have personal goals. Some may include dropping a couple of strokes or pounds, or, thanks to the commercials run by various financial service providers, long-term financial independence may now be a more popular goal than ripped abs. The commercial I like best is the comparison of the individual’s lifestyle to his or her retirement savings as measured by a yellow ribbon. In the ad, very few are able to continue their current spending to the appropriate ripe old age. So, do you have an appropriate exit strategy?
My experience with clients over the last 30 years, including business owners, indicates that, with few exceptions, the retirement nest egg is not the priority it should be and thus, we see a lot of “short yellow ribbons.” Carefree living can only be achieved when your net worth exceeds the gravitational pull of 100 percent of your financial needs. That is when you have achieved exit velocity.
Exit Velocity Defined
If you’re currently employed by a company that doesn’t have your name on the door and plan to finish your career there or someplace like it, achieving your exit velocity is a matching exercise. With the help of financial professionals, like our folks at Concentric Wealth Management, you can figure out, with a high degree of accuracy, what your combination of savings, home equity and retirement plan assets will be worth at your planned retirement age, as determined by the rate of return you can expect based on the risk profile of your portfolio.
In this instance, exit velocity is achieved if your wants and needs at retirement match the return on your net worth. Although your yellow ribbon may be thinner than you would like, this technique will ensure the correct length.
Exit Velocity for Business Owners
This process is far more risky and complicated if you own a business. Sure, you still have savings, a house, and a retirement plan, but your principal asset, your business, only has value if it’s capable of being sold. Unfortunately, only one in three businesses meet this criteria. Most business owners believe just because they’ve run a profitable and growing business, they’re going to cash out big when it’s time to move on and achieve exit velocity. However, most often there’s not enough fuel in the business rocket to leave the launch pad, much less escape the gravitational pull of the business owner’s usually lofty financial “needs”.
To ensure a business sells at the right price, the owner must consistently view the business as an asset that, like a portfolio, must be managed. Usually owners are focused only on cash flow from the business (and funding their sometimes outsized “needs”), but not developing a business that will be capable of consistent performance no matter who’s in charge. As a result, most of the company’s value is dependent on the owner’s input, presence and judgement. To properly manage a business asset, the owner must move from working in the business to on the business. Working on the business means primarily creating processes that allow the business to operate without the owner and continue to produce sustained and profitable growth. This is tough, but it’s what smart buyers demand, and all buyers are smart.
Clearly, exit velocity, whether you’re an employee or a business owner, can only be achieved through deep thinking guided and facilitated by experts like your friends at Burke & Schindler.
Pat Burke is managing partner at Burke & Schindler and is the author of Exit Velocity: An Entrepreneur’s Quest for Financial Freedom.