A Guest Post by Voisard Asset Management Group

Every business owner has an expectation of what they think their business may be worth, but in reality, the market may say something different.  Similar to the expert role Calder Capital plays in this evaluation, Voisard Asset Management Group has been in the position to assist business owners answer the question of “How much do I need?”  Knowing what you need to sell your business for to generate the standard of living you expect is sometimes the difference between a comfortable transition or an unwelcomed surprise.

Voisard Asset Management Group, a financial planning and wealth management firm, has helped many business owners navigate this process.  This includes the transition of drawing income from their business to drawing income from their assets, which for most business owners may be a foreign thing to do.  Inevitably, somewhere in the planning process, we are always asked how much they need to sell their company for to retire comfortably.  While the question seems simple, the answer is often complex as there are many variables worth considering.  The variables always differ as every business and business owner is unique.

While we cannot go through all the variables without knowing the individual circumstances, we can provide a process that should be used to estimate how much money is needed to meet your lifestyle needs.  This process should be used as a barometer, not as a replacement for a financial plan.  Rules of thumb are never accurate enough to make decisions by, but instead can be used as a first step in your evaluation.  Our process below should be viewed the same; It will tell you if you are in the right ballpark, but not if you will win the game.

Step 1:  The Basic Budget

The first step always begins with a basic budget.  This can be a foreign task for business owners as the business has covered many of their needs on a day-to-day basis.  We find that when there has never been a need for a budget, people often have no idea what their true expenses are.  This first step is crucial, as the amount spent on an annual basis has the largest impact on how much is needed from the business sale to retire.  We have seen too many business owners surprised by what they spend in retirement because they rushed through or skipped the first step entirely, or that they forgot to include the items that the business previously covered that they are now responsible for (phone, car, insurance).

Step 2:  Income Sources in Retirement

Now that you have gone through step one, you know what you are expecting to spend each year in retirement.  Fortunately, the portfolio doesn’t need to cover the entire annual budget.  Many business owners may still have pensions, social security income, business payments or consulting income that will reduce this annual spending need.  Once you have offset your spending by the cash flow anticipated, you can boil this number down to the annual income needed from the portfolio.  You are now in a much better spot to determine what you need to net out in the sale of the business.

Step 3:  Calculating the Amount Needed to Retire

While we hate to use rules of thumb (they are based on averages, and no one is average), we will use one here to allow you to estimate the balances needed to retire.  Research has shown that a sustainable withdrawal rate from a portfolio is 4%.  Essentially, one can take a 4% withdrawal from their portfolio and the balances are not expected to be exhausted prematurely.

How does the math work?  If you have determined that your annual need from the portfolio is $100,000, your portfolio balance should be around $2.5MM ($100,000/.04).

Step 4:  Spend the Time Working Through a Financial Plan

If the process above sounds over-simplified, it’s because it is.  It does not take into consideration many other important variables that must be worked through prior to deciding “how much is enough?”  These can include one-time purchases, gifting desires, inheritance objectives, portfolio positioning, timing of returns, and income taxes.  Spending the time to work through these additional details by creating a full financial plan takes time and effort, but it is well worth the effort to ensure you enter retirement on the right track with a high probability of success.  For example, research has shown that through proper asset withdrawal techniques, a portfolio’s life can be increased by up to 6 years!

There you have it!  In a nutshell, generate a budget, determine your fixed income sources, calculate the amount you need to retire, work through a financial plan and retire in style! While this sounds simple, we are confident that you will find some twists and turns along the way.  This is the reason we suggest everyone hire a qualified professional to assist you.

Voisard Asset Management Group is a full-service financial planning and wealth management firm that assists clients with creating individualized financial plans.  Our team of professionals include Certified Financial Planning® professionals all capable of walking you through this process.  Our website can be found at www.voisardgroup.com.