In its simplest form, Counting Beans is about taking stock of how many assets you have saved outside your business, determining how much income you will need post-transition, and then calculating how much money you will need from the ownership transition, which is your Wealth Gap.
As a business owner who is thinking about transitioning out of your business, counting beans or taking stock of your assets will allow you to determine how reliant you are financially on the proceeds from the sale of your business. Because most owners have the majority of their money tied up in their businesses, it is important to consider what you will need to take away from your transition.
In our book, Cashing Out of Your Business, we outline how owners can diversify their wealth and ensure that their assets aren’t all in one basket:
Very few business owners are independently wealthy outside of their businesses. The vast majority will need to extract money from their companies to fund the rest of their lives, which is why it’s so important to take stock of your assets – inside and outside the business.
Additionally, many owners have increased their spending (ratcheted up their lifestyles) to match the increasing profits of the company. Most of the time, this is done to avoid hefty taxes, however, this can be risky. If a family’s wealth is tied up in the business, it will be at risk if the company’s profits drop.
The fastest way to leave a legacy behind is to lose the family fortune in the family enterprise under your watch! By keeping a diverse investment profile, you will ensure that your business is not you, or your family’s only source of income and wealth, and you will have more choices for exiting your business.
Determine Income Needs
This step refers to analyzing your current and post-transition personal income needs. Whatever your lifestyle may be, you want to make sure that you can continue living the same way after the transition out of your company. Don’t forget that you may spend more money after the transition when you have more time on your hands.
Consider sources of income other than your salary in order to fund your post-transition lifestyle. These sources may include real estate rental income, interest, dividends, and hopefully social security. Some owners may choose to work at least part-time or have consulting income. All of this other income will help you to reduce your dependence on the net proceeds from the sale of the business.
Calculate Your Wealth Gap
The difference between what you currently have saved outside the business and how much you need to have outside the business to generate your desired income is known as your Wealth Gap.
Many business owners do not have adequate funds saved outside of their businesses and will rely entirely on the sale of their company to fund the rest of their lives. However, their businesses may not be worth enough to close their Wealth Gap. Owners should assess their businesses, think about where they are in their lifecycle, and determine what steps will need to be taken to achieve the optimal business value in order to offset their Wealth Gap.
In addition to determining your Wealth Gap, it is important for all owners to have a Contingency Plan to further protect your assets regardless of how old you are. Premature death or disability of an owner can have a tremendously negative effect on your business and your family.
How much will you need when you leave your business? “Counting Beans” helps owners to answer that question and protect their businesses and their families against unforeseen events, both inside your business and out. Taxes, death, disability, economic recessions, industry changes, etc. will always be challenges that business owners must face but by being proactive and diversifying your wealth, you can increase your financial profile and reduce your dependence on your business transition.
Cashing Out of Your Business
Cashing Out of Your Business, co-authored by Jane M. Johnson is written especially for business owners. It introduces the concept of business ownership transition planning and outlines the framework that may be used by ALL owners to analyze their current situation, determine their goals, and design a Business Ownership Transition Plan that is custom to their needs. Over the next few weeks, we’ll delve into each step of our easy-to-follow business transition planning process, and explain how it can help ensure a successful transition. Creating a Business Ownership Transition Plan involves:
- Getting Yourself Prepared - Preparing yourself for the transition
- Counting Beans - Calculating your “Wealth Gap” or how much money you will need from the transition
- Building a Better Box - Determining how much your business is worth today and how that matches up to your wealth gap
- Follow the Yellow Brick Road - Analyzing your options for both internal and external transfers
- The Art of the Deal - Deciding which transfer option is most suitable to your goals
- Paint by Numbers - Pulling all of the details into a written document that outlines your customized transition path and what you must do to succeed