Plan your business exit to optimise your wealth goals

ONE of the biggest assets on entrepreneurs’ personal balance sheet is their business. Yet, I have observed that many do not integrate it with their own personal wealth planning. Instead, they depend solely on their personal assets to fund the life goals they want to achieve.

To be fair, integrating one’s business assets into personal wealth planning is not an easy task, even for wealth advisers. How do you estimate the value of businesses in private markets in, say, 10 years’ time? In listed securities, at least there is enough data for us to estimate expected returns.

There is also the need to determine when owners will exit their businesses. Business owners are so busy ensuring that their enterprise survives the infant years. Past the survival stage, they focus on profitability and growth, leaving no time to consider retirement.

Working professionals are more likely to be able to tell us their preferred retirement age than business owners. Entrepreneurs seldom think about exiting the company they built, and regard as their “baby”. But the truth is, whether they like it or not, business owners will all have to exit their businesses one day – whether due to death, poor health or retirement. If they fail to plan in advance, they may not be able to extract the best value from what they have built. They may not find successors, and the business may ultimately fail and their employees and customers will not be cared for.

What does a good business exit plan look like? These are the areas to consider in a comprehensive business exit plan:

Financial

Business owners first need to have a comprehensive wealth plan to establish the capital required for them to enable their life goals at different life stages. After considering their personal assets, it is necessary to determine how much the business value ought to be in order to close the gap.

For example, a business owner needs S$20 million in capital in order to enable their life aspirations. If their personal assets are going to be worth S$8 million, then their share of the business has to be worth S$12 million. We must then determine the current value of the business to establish the value gap. If their share of the business is worth, say, S$5 million today, the value gap is S$7 million.

It is also possible that business owners may not want to sell their business when they retire, but instead continue to be shareholders after handing over leadership. If this is the case, then the wealth plan has to address the income gap between what they need and the income that their personal assets can give them. Their business exit plan will then have to address how they can derive a stable source of income as shareholders.

The financial aspect is also about putting in place legacy and estate plans to capture the fair value of the business when their health fails or at death.

Business

The business aspect is about putting in place strategies to close the value gap or income gap that was established earlier. When establishing the value of a business for the purpose of a buy-sell transaction, we use various methods such as discounted cashflow of projected future earnings or revenue. We also use market comparables to arrive at the value of the business.

Industry norms such as Ebitda (earnings before interest, taxes, depreciation and amortisation) or revenue multiples are then used to check against the resulting valuation. In my industry, percentage of assets under management is also used. For example, if an industry norm is three to seven times Ebitda, and if a company’s Ebitda is S$5 million, a valuation of S$15 million to $35 million would be acceptable.

But I have done several transactions in the past, and I know that the actual amount is really decided between willing buyers and sellers. In order to convince buyers to move closer to the higher end of the multiples, business owners need to work on the four “Cs” of their business. These are:

• Human capital. This comprises a company’s plan to hire, reward, retain talent and a clear succession plan.
• Customer capital. This is about having the right spread of customers so that revenues are more reliable instead of depending on one or two big customers. It is also about creating unique value in your offerings, so that the business is hard to replace.
• Structural capital. This involves building strong systems, technology and processes, and having intellectual property protection.
• Social capital. This is the software of the company. It is about building a strong culture, creating a work rhythm in the company, and brand building.

Personal

The personal aspect is perhaps the most neglected. To many business owners, the company is their life’s work, their identity. They cannot imagine exiting it, and that is why many business owners do not plan for it.

In the 2023 National State of Owner Readiness Report by Exit Planning Institute in the US, 1,162 survey participants in the country were asked about their personal readiness to exit from the business. On average, only 36 per cent among them indicated an above-average personal readiness. To have a successful exit, entrepreneurs need a written plan on what life should be after the business, and actively work towards it.

Years ago, I started my own exit-planning journey. The company was growing well and as the founding team aged, I felt it was the right time to think about succession. Some clients were also naturally concerned about the future of the firm.

So, I cast a 10-year vision for the firm, setting a timeline on when I would hand over leadership and ownership. I decided on the target valuation of the firm based on what I hope the smallest working and founding shareholders should get when they retire from the firm.

Then I put in place a 10-year strategy to achieve the financial milestones, and to build the 4Cs. I shared the vision with the staff and clients regularly. Personally, I am grateful to God for where I am today. I never would have imagined 25 years ago that the son of a bus driver would be able to advise affluent families and manage assets in excess of S$1 billion.

Because I was an underdog, when I finally retire from financial services, I hope to coach and encourage the disadvantaged, the underdogs and corporate executives who are burnt out. I have been preparing myself for the day of my business exit.

The biggest benefit of a comprehensive exit plan is that it provides clarity. Not only was I able to reject a few offers to acquire us, we also experienced exponential growth in the last four years.

The writer is chief executive officer of Providend, South-east Asia’s first fee-only comprehensive wealth advisory firm.