The Importance of a Personal Financial Plan During Exit Planning

When planning an exit from a business, there are numerous factors to consider. While many of these factors pertain to the business itself, I would argue that a personal financial plan (often overlooked) is a significant factor in exiting a business successfully. In turn, this article will focus on the quantitative and qualitative factors that pertain to a personal financial plan.

If you are exiting a business, you have most likely spent a significant portion of your life (and finances) building the business to a point in which it is desirable for someone to purchase. While there might be a transition period in the exit, it is important to think beyond to when you will no longer be associated with the business. There are a few qualitative factors to consider in your timeline. Why will you wake up every morning? How will you use your time? What are your personal and financial goals? You may be able to answer these questions easily, but you’ll need to ensure that these ideals and goals are able to be met within the confines of your financial situation. If you can’t answer these questions so easily, make it a priority to do so. Otherwise, you may end up developing bad habits in this new phase of life that are detrimental to what you’ve worked so hard to build. 

Once you’ve answered those questions, a personal financial plan should incorporate quantitative factors into your future goal planning and is key in determining whether or not your goals are realistic. Whether you are in the process of selling your business or just considering it, I would encourage you to consult your trusted financial advisor or find a CERTIFIED FINANCIAL PLANNER™ practitioner to move forward with a financial plan. When constructing this plan, there are several areas of focus, broadly outlined below, that may serve as a starting point for you.

Cash Flow Modeling

Defining your projected inflows (income from all sources) and outflows (expenses) should equal out. Is there a discrepancy creating a cash need that your future income is not covering? If this is the case, you will most likely turn to your investment portfolio to supplement your income. While everyone’s situation is different, an industry rule of thumb is to try and maintain a “burn rate,” or portfolio withdrawal rate, of less than 4% per year as to not exhaust your investment portfolio during your lifetime.

Oftentimes, we forget about large future expenses that may or may not occur. Whether they be new cars, unforeseen home repairs and improvements, or future education funding and wedding payments for children or grandchildren, planning for potential surprises through cash flow modeling may save you from a world of financial hurt in the future. 

Are you carrying a mortgage and/or other large debt balances? Hopefully, your business payout reduces or eliminates the balances, but if it doesn’t, these payments need to be factored into your cash flow calculation.

Investment Planning

Equally important to keeping a low portfolio “burn rate,” defining your personal Investment Policy Statement (IPS) is a critical piece of your plan. Included in the IPS are a set of standards and beliefs that should serve as a long-term guidepost for your investment portfolio and determine your asset allocation. This document should paint a clear picture your risk tolerance, cash needs, investment objectives and other considerations, such as tax strategies and restricted investments. 

Another important part of investment planning is diversification, and it comes in two forms. The first and the most well-known definition of diversification is investing your funds into different asset classes. This strategy allows you to spread your risk and dampen volatility. The other and less often discussed type of diversification is represented by an age-old saying: “don’t put all of your eggs into one basket.”  Baskets, or “buckets,” are an important part of your investment and cash flow planning and include cash, equities and bonds. Varying the type of investments you hold also helps to manage volatility should you need to pull from your portfolio in the near-term. If you need to take distributions from your portfolio for cash flow purposes, it is suggested that you hold a year’s worth your funding needs in cash or a cash-like investment.

Estate Planning

Now that you’ll be selling one of your biggest assets – your business – and most likely creating an investment portfolio as a result, it is crucial to review and, if necessary, update your estate plan to ensure that your assets are distributed to the appropriate beneficiaries at your passing.

Risk Management

In most cases, your business may have provided insurance – life, disability and health, at least. Personal insurance policies, no matter the type, are typically more expensive and often harder to attain than business policies. It is critical to determine your insurance needs, research different policies, and budget appropriately.

Tax Planning

There is a good chance that if you are selling a business, you will be receiving a large payout. If this is your first time investing a serious amount of cash, be prepared to pay taxes on capital gains, dividends and interest on a yearly basis. You may also need to make estimated tax payments, since you will no longer have taxes withheld from your paycheck. Working with your trusted tax advisor before and throughout your exit planning process, alongside the financial advisor producing your financial plan, should help to produce vital tax strategies to set you up for future success.

Although a high-level summary, the financial planning topics listed above should be added to your exit planning checklist. Forming a relationship with a CERTIFIED FINANCIAL PLANNER™ practitioner, alongside your trusted tax advisor, and completing a detailed personal financial plan is the first step to ensuring a bright financial future as you transition into a well-deserved phase of life.  You’ve worked hard to make it this far. Don’t look past the personal details that are essential to making your exit plan successful.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.