Business owners have always sought, with varying degrees of success, to create a stream of income after we exit our companies that matches the income we enjoy while owning them. Today, the difficulty of that task has increased exponentially for three reasons.
The growth of the S&P 500, including dividends, has averaged 4.25 percent in this century and the current yield on the Treasuries is 1.8 percent. This means investment growth and income has remains stubbornly low. So today’s post-exit investment income is far lower than pre-2000. Earnings multiples that buyers are willing to pay for businesses worth a few million dollars (and less) do not seem to have risen as much as multiples for businesses worth $5,000,000 and more. Life expectancies for you and your spouse have risen. Prepare for your inevitable exit by investing the excess distributions you receive today from your business. Larry was able to invest $250,000-$400,000 a year—the after-tax amount of the earnings that could be distributed to him. Focus on growing business value and cash flow. Engage in an exit planning process with skilled advisors. As part of that process you will focus on methods, tools and designs to increase transferable value. A side benefit of this process is that your role will likely change—for the better. Your day-to-day “hands-on head-down” efforts must give way to a “head-up hands-off” if the company is to have full value without your leadership. I find that owners find much greater enjoyment in doing what they do best, rather than doing what they believe they have to do. Accept that you may have to remain in the business longer than you planned. Prepare yourself and your business for this reality.The longer you wait to accumulate outside wealth, grow business value and carry on as usual, the longer you will remain in the harness. Remain in the business indefinitely. Exit and reduce your lifestyle.The consequences of staying in your business or exiting it are dramatic, but the great thing about being an owner is that the decision is yours.The reality for most successful owners is that only way to achieve our aspirations is to bring grit and determination to tackling the challenges we face and to create a strategy to overcome them.