• Home
  • Services
    • Audit
    • Small Business Accounting
    • Consulting
    • Estate & Trust
    • Forensic & Fraud Prevention Services
    • Succession & Acquisition
    • Tax Planning & Compliance
    • Valuation & Litigation Support
  • Industries
    • Construction
    • Finance and Leasing
    • Manufacturers and Distributors
    • Health Care
    • Real Estate
    • Restaurant and Retail
    • Service
    • Not-for-Profits
  • About Us
    • Affiliates
    • Memberships
    • Mission & Vision
    • Our Team
    • Our Firm’s Peer Review
    • Recognition
  • Careers
  • Resources
    • Blog
    • Newsletter
    • Succession Planning Guide
    • Profit Planning Guide
    • SafeSend Tax Returns
Contact
  • Home
  • Services
    • Audit
    • Small Business Accounting
    • Consulting
    • Estate & Trust
    • Forensic & Fraud Prevention Services
    • Succession & Acquisition
    • Tax Planning & Compliance
    • Valuation & Litigation Support
  • Industries
    • Construction
    • Finance and Leasing
    • Manufacturers and Distributors
    • Health Care
    • Real Estate
    • Restaurant and Retail
    • Service
    • Not-for-Profits
  • About Us
    • Affiliates
    • Memberships
    • Mission & Vision
    • Our Team
    • Our Firm’s Peer Review
    • Recognition
  • Careers
  • Resources
    • Blog
    • Newsletter
    • Succession Planning Guide
    • Profit Planning Guide
    • SafeSend Tax Returns
Call Us
Get Directions

Blog


Home / Blog / Quantify your Resources: The Ultimate Exit Test

Quantify your Resources: The Ultimate Exit Test

July 10, 2013 by Stephanie Potash

est

This issue brought to you by:

Michael Dentamaro & Hannah Thoms

Michael Dentamaro & Hannah Thoms
Gordon Advisors. P.C.
michael.dentamaro@gordoncpa.com
https://gordoncpa.com

Quantify Your Resources: The Ultimate Exit Test

In the first Step of The Seven Step Exit Planning Process™, you, as an owner, establish three primary exit objectives:

  • The date you wish to exit;
  • The amount of cash you want upon exit; and
  • Your choice of successor.

Today, let’s look carefully at that second objective: How much cash will you need from the sale of the company to enjoy a financially secure post-business life? For most owners this is a great starting point for determining when, or if, they can leave their businesses.

Peter Daniels was the 58-year old (fictional) owner of Daniels Food Processing, Inc. He had engaged his financial advisor to:

  • Set a realistic assumption for a rate of return on Peter’s investments;
  • Research actuarial information to determine average life expectancies for both he and his wife; and
  • Help him and his wife agree on and establish an acceptable post-exit annual income amount.

As part of this process, Peter and his advisor reached the critical question whose answer would determine Peter’s ability to retire on his terms: What must the value of Peter’s business be if Peter is to leave, as he desires, at age 63?

Like Peter, your resources are likely both in the business and outside of it. You need to know the value of both so you can determine if there is a gap between the amount of money you will need in the future and the amount you have today. This gap must be quantified and—to exit successfully—you must create and implement a plan to close that gap. Most owners retain an experienced financial planner to help with this project.

Peter and his advisor used the following process:

First: Peter and his wife (Pam) agreed on their future annual income needs. They believed that they could live on $200,000 per year (95% of their current income) and would require that level of income for approximately 30 years (based on their life expectancies).

Second: Peter and his advisor, using their agreed-upon estimate of a projected rate of return, calculated that Peter’s non-business investments assets would be worth approximately $500,000 in five years (Peter’s desired exit date).

Third: Peter’s advisor calculated that the amount of investment capital needed to pay Peter and his wife $200,000 per year for the duration of their lives (based upon current actuarial tables and assuming a seven percent investment return*) beginning five years hence is approximately $3,000,000. Thus the net (after tax) sale proceeds from the sale of the business must be $2,500,000, or between $3,000,000 and $3,500,000 pre-tax.

Fourth: The business is today worth between $1,000,000 and $1,500,000.

Bottom Line: The gap between what Peter has today and what he needs to retire on his terms is about $2,000,000. Therefore, Peter must increase the value of his company by at least $2,000,000 if he is to exit on his terms.

This is why Peter needs at least five years to plan and why he must start today.

Many of you can identify with Peter’s situation because you face the same challenges. Peter knows what he has to do and he’s found the motivation to start the planning and preparation necessary to leave his business in style. Have you?

For Peter, and perhaps for you, five years is a tick away. It’s time to get busy.

Contact me for a recommendation about who can help you to determine your business’s current value and the gap (if any) between what you have today and what you’ll need in order to exit on your terms. We can help you to understand your ultimate objectives and what you must do to reach them. Contact us today if you’d like help getting started.

*In today’s market, few financial advisors are comfortable projecting a seven percent investment return and few owners can tolerate the risk involved in achieving that rate. If half that rate of return is a more realistic figure, then the owner’s principal (in this case business sale price) must almost double to yield the same amount of income.

Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code or; (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

© Copyright 2013 Business Enterprise Institute, Inc. All Rights Reserved


Recent Posts

  • New Gordon Advisors, P.C. Shareholders Announcement
  • Nine financial KPIs construction firms should be tracking
  • How better job costing is the key to unlocking greater profitability for your construction firm
  • Biden Administration Releases Explanations of FY2022 Budget Tax Proposals
  • What Businesses and Individuals Should Know for the 2020-2021 Tax Season

Categories

  • Accounting
  • Business
  • Financial Planning
  • Gordon Advisors, P.C.
  • Litigation / Valuation
  • Small Business

Testimonials


“Many years of accurate, thorough, prompt service regardless of which employee or department.”


— President, Manufacturing. Gordon Client for over 30 years. —

“Always there for our family and our business. 100% trust from all partners. Service could not be better. ”


— CFO, Retail. Gordon Client for 18 years. —

“Easy to work with - professional and friendly!”


— Individual, Trust Accounting. Gordon Client for 7 years. —

“Excellent service and excellent advice.”


— Individual. Gordon Client for 11 years. —

“Friendly, trustworthy, knowledgeable, quality work, at a reasonable price. ”


— Individual. Gordon Client for 15 years. —

“I & our companies have worked with Gordon Advisors for many years and they have always been high quality.”


— Owner, Restaurant. Gordon Client for over 30 years. —

“We have been with your company for many years and still have a very good relationship. We are always given the best advice and receive total co-operation. ”


— Trust. Gordon Client for 8 years. —

“Gordon Advisor has always gone the extra step addressing my needs, answer my questions and making me feel special. Even though I'm not their biggest customer. ”


— Individual. Gordon Client for 17 years. —

“We have been working with Gordon Advisors for 20+ years. Wonderful people. ”


— Controller, Manufacturing. Gordon Client for 22 years. —

“As we are a charity, I would recommend their services to other charities as they are familiar with the needs of a charity. ”


— Executive Director, Not-For-Profit. Gordon Client for 14 years. —

“The staff are all highly capable, friendly and accessible. Gordon Advisors are a great resource to our organization and have always treated myself, the staff and my Board of Directors with the utmost respect. ”


— Executive Director, Not-For-Profit. Gordon Client for 12 years. —

“Excellent relationship with Gordon Advisors for the past 34 years. They do our yearly audit and are professional, caring and efficient. We are extremely happy with the work done for us, and the board votes every year to keep them as our auditors. ”


— Executive Director, Not-For-Profit. Gordon Client for over 30 years. —

“Over 20 years of service. They are friendly and professional. We've never been disappointed. ”


— CEO, Construction. Gordon Client for 20 years. —

“We always receive good service and value. A great friendship and understanding has been developed over the years. ”


— CFO, Manufacturing. Gordon Client for 18 years. —

“They have been very helpful and responsive, and have always met our needs. ”


— Manager, Hospitality. Gordon Client for 7 years. —

“The service provided is consistently delivered on a timely basis with value.”


— CFO, Medical Device Manufacturing. Gordon Client for 14 years. —

Contact Us

248.952.0200

248.952.0290

1301 West Long Lake Road
Suite 200
Troy, MI 48098

Helpful Links

  • Home
  • Services
  • Industries
  • About Us
  • COVID-19 Resource Center
  • Our Team
  • Careers
  • Blog
  • Newsletter
  • SafeSend Tax Returns
Gordon Advisors

2022 © Gordon Advisors, P.C. | All rights reserved.