“I’m not in the meth business. I’m in the empire business.”
How much do you need to maintain or elevate your lifestyle after selling your business? Everyone has different needs, wants and goals post-closing. There isn’t a one-size-fits-most plan that will work in any situation. At JSP, we have relationships with CFPs around the US. These financial professionals have created guidelines for business owners that provide valuable insights to help you answer the question, “How much do you need?”
Final Multiple. The simple plan is to walk away with 10 to 12 times your annual income. If you plan on hanging up your cleats at 67 and your take home is $500,000 annually, then having between $5 – $6MM is your target. A multiple of your final working year’s income is an appealing guidepost, because it’s easy to calculate, especially the closer you are to retirement when your final annual compensation is easy to estimate.
Pacing Angle. A multiple of your annual income at your current age. By age 50, accumulating 6-8X your current income is your target to be reasonably confident to maintain your lifestyle.
SWR. The recommended safe withdrawal rate is the amount you can withdraw from your retirement accounts annually to ensure you will have enough income for approximately 25 years. The SWR is about 3-5% of your retirement accounts each year.
The Club. One million doesn’t go as far as it once did, and having over $1MM puts you in a higher percentage of most Americans. However, the Club is where you may want to go, aka FU Money; made famous in The Gambler movie, by John Goodman. ‘When you get up $2.5MM’ and your 25-year roof has now grown to $5MM and adjusted for inflation is about $10MM today. The Club helps you secure sufficient savings to draw down, meet your financial needs post-closing and enjoy the next stage of life for you and your family.
Although we’re oversimplifying here, following any of these suggestions can help you plan for the future. The point is take a look at where you are in your business journey, evaluate current state and your desired state. There’s a path forward for you and adopting a grow smart to sell smart strategy begins with the answer to ‘how much do you need’ relative to a time frame of a desired exit date. Every business case is different and this is not the time to compare your situ to your Wednesday golf buddy’s at the country club. Here are some factors to evaluate when estimating your income needs in retirement.
What Factors Affect How Much?
When do you want to exit? If you know the age you want to cash out your chips, it will help you know how much longer you have to grow those funds. The earlier you want to exit, the greater the funds you’ll need, AND the more prepared to sell at a premium is likely.
What Will Your Lifestyle Look Like?
One of the most important factors in determining ‘how much’ is your post-closing spending based on your expected lifestyle. What would you like to do? Traveling the world will cost more than spending most of your time with your grandchildren. Some people move on from their exit and then embark on a vocation or start another business or some other income producing opportunity to supplement their proceeds.
What’s Your Expected ROI?
Part of a well-thought out wealth management plan is calculating a conservative return on your investments. The plan will help you determine whether you are on track to meet your retirement savings goals or if you need to make adjustments to your investments. or lifestyle. Additional factors include inflation rates, investment portfolio performance, health care costs and other factors. For instance, anticipating your heath care costs for you and your family are weighed heavily as the amount is likely to increase over time.
While using an online retirement calculator is a reasonably simplified version to ball-park things, it’s reserved more for employees and not for business owners. Always consult with a financial professional who works with successful business people like yourself.
The Bottom Line
Literally everything you must know is wrapped into the bottom line. The answer to the ‘how much’ question requires a fair amount of introspection and analysis. Whether you choose any of the above suggestions of income multipliers or percentages to guide you, it’s no substitute for professional advice. We will gladly point you to professionals around the country we have relationships with or do it on your own. But do it, and do it sooner than later as you’re not guaranteed tomorrow. The last thing you want to see occur is your physical exit leaving the sale of your business vulnerable to a ‘must-sell’ situ. With a defined target, you’ll know better what you’ll need get you there. When you’re making plans for a lifetime, you should have someone you can turn to with questions and guidance.
