Article : Exit Planning — Gap Analysis

In recent years, I've been providing more of my clients with Exit Planning guidance. As we Baby-Boomers age, this is of course smart planning. These successful entrepreneurs realize that they need guidance and time in order to get their company ready for sale. Before making any specific plans about when or how to sell their company, I always recommend that we complete a Gap Analysis.

“The beginning is the most important part of the work.”

— Plato

A Gap Analysis is an essential tool that quantifies the financial gap that might exist between retirement requirements and existing financial resources. In my experience, the vast majority of business owners do not conduct a realistic Gap Analysis when they are getting ready to sell their business. The result of this lack of planning can be disastrous to the business owner's retirement plans. The key factors that must be quantified are:

  • Desired retirement income: This could include possibly increased travel after retirement, support or education for children/grandchildren, charitable giving, second home, medical expenses. It is not realistic to assume that your spending will decrease substantially after retirement.
  • Number of years that you want to work in the business: If you want to retire from the business in only a year or two, you have a very limited amount of time to reduce or eliminate any financial gap that might exist between retirement requirements and existing assets. Alternatively, if retirement is not desired for five or more years, then the gap can be reduced substantially by increasing the value of the business, and increasing retirement account assets through additional contributions and investment returns.
  • Value of current financial assets outside the company: This should be easy to determine, as long as they are readily marketable.
  • Prudent withdrawal rate or investment returns from investment accounts during retirement: Many people use unrealistic assumptions. A four-percent withdrawal rate is an often used rule of thumb, but your financial advisor should be consulted.
  • Other sources of income such as Social Security, Pension Plans and Annuities: These should be quite predictable.
  • Life expectancy: A major risk is that you "outlive your assets". Life expectancy trends continue to increase, so one should assume that you (and your spouse) will live longer than the actuaries predict. And if you leave a substantial estate, your heirs will be the financial beneficiaries of your conservative assumptions!
  • Current Value of your Company and Net Sale Proceeds: This is typically over-estimated, often dramatically, by business owners. Hiring a valuation specialist is recommended in order to develop a realistic current value. This valuation is just for planning purposes, so the cost of obtaining a valuation can be very reasonable. Brokerage fees (if the company is sold to an outside party) and taxes resulting from the sale must also be factored into the analysis.
  • Future Realistic Value of Company if it is sold in the Future While it can be realistic to assume some increased business value in the future due to revenue/profit growth, look hard at the assumptions behind this upside growth. If the company has been growing at 3% annually for the past five years, why should we assume 10% annual growth going forward? Can costs actually be cut without jeopardizing customer service or new business growth?

Once all of this information is quantified, it's a straight-forward process to determine if there is a "Gap", and if so the size of it. Then, we can work on some or all of the factors described above in order to eliminate the Gap in a way that fits your needs.

© Copyright David W. Kellogg 2016. All rights reserved.


What Our Clients Say

“Because of Dave's large-bank experience and his desire to work with small entrepreneurial companies, he is able to be a highly effective bridge between entrepreneurs and financing sources. He provides much more, however, by getting directly involved with the details of the business plan.”

- Randy Spencer, CEO
  Concordia Manufacturing, LLC

Join Our E-Mail List

To join, enter your email address below and click "Join". We will not use your address for anything except our newsletter, and you can discontinue your subscription at any time.