Setting Budgets—An Important Step Toward Exiting Your Business

November 22, 2016Exit Strategies, Financial Integrity

When you talk to the average employee in America, a budget fits squarely into regular life. Like clockwork, each month the fixed income goes in a column against a predictable outgo column.

Something different happens when you cross the line into the entrepreneurial realm. The ability to create income, win contracts, and bring home the bacon in an even bigger sense morphs the approach when it comes to stringent budgets. Rather than clockwork predictability, income comes in waves tied directly to how many hours a business owner invests into the business. Variable income creates an unpredictability that struggles to fit into the constraints of your traditional budget.

“Why plan for a month that you aren’t sure what the income will be?”

Despite the unique challenges business owners face creating budgets, in order to successfully exit, there are several key budgets that need to be in place. At Exit Consulting Group (ECG), we work directly with businesses to create and implement necessary budgets as part of an overall exit strategy.


Developing a Business Budget

Just as the entrepreneur struggles to fit personal finances into a stringent budget, so does the business owner when accounting for a corporate budget. Part of running a business means living constantly in survival mode. Week to week, month to month, the owner reviews cash on hand to address expenses popping up in the business.

To develop the sense of predictability that a buyer desires, the business needs to start building out one-year, three-year, and five-year budgets. While you can never accurately predict what each year’s revenue will be, the goal is to build out predictions based on past years and trends. A business that spent $500,000 on personnel last year will spend a minimum of half a million this coming year.

Financial models and budgeting go hand in hand with business planning. If your business has expanded 30% each year for the past five years, most likely you will expand again next year. With that expansion comes the increase of new staff members, equipment, and office space. That $500,000 on personnel will likely grow to $650,000 within that coming year.

How often should equipment be replaced? In today’s technology-dependent world, computers and network costs eat up a large part of the budget. If you have 45 computers that need to be replaced every three years, plan to replace fifteen every year.

Getting these predictions, expenses, revenue projections, and equipment lifespans down on paper plays a crucial role in preparing a business for a sale. It all starts with a corporate budget.


Creating a Personal Budget

Once the business budget starts to come together, we turn to personal budgets. While building out a five-year budget for the business causes challenges, creating a personal budget proves to be an even larger hurdle. Entrepreneurs by nature make the current circumstances work in their favor. Each month they look at the money they can bring home and “make it work.”

To effectively move into the next budget, retirement planning, our team needs an accurate picture of how much you need to maintain your current lifestyle. This means nailing down current costs and expenditures.

Every business owner has some component of their personal expenses comingled with the business expenses. Your family’s cell phone plan bills go to the corporate office. The business has car allowances that cover regular vehicle maintenance costs. The Hotel Del Coronado membership caters to business meetings. These need to be taken into account when itemizing your personal budget.


Planning for Retirement Budgets

The last and final budget is an extension of the personal budget. Once we understand how much you need to live off of today, we start working to define what that looks like in retirement. This work goes hand in hand with setting retirement goals and defining a successful exit, particularly if your business represents a large portion of your retirement assets.

While the aforementioned costs built into the business, such as the cell phone plan and vehicles, are legitimate expenses, once you sell the business you’re on the hook for everything with after tax dollars. Additionally, the cushy corporate healthcare plan and other insurances will fall to your plate. For more of these overlooked expenses that continue into retirement, check out this list of unexpected numbers when planning for retirement.

Accurate retirement planning wouldn’t be complete without accounting for 401k, social security, and other incomes streams, such as real estate. Together we work to make all of these puzzle pieces work to create a picturesque retirement picture.

Last but not least, there is one other crucial aspect of retirement planning that we work on with our clients. Moving forward, exiting business owners will need to adapt to living on a fixed income. For individuals who have spent the better part of their life going out and earning what they need to cover their expenses, this will be a large shift.


Bringing in the Experts

Budget planning highlights only one aspect of the exiting process. This extremely complicated transaction has multiple components, tax implications, and defines the future of the business.

At Exit Consulting Group, we specialize in helping business owners put together comprehensive exiting strategies that work to achieve key goals for retirement, realize their long-term goals for the business, and successfully execute the transaction.

While many businesses bring in exit advisors within one year of the sale, the most successful, and lucrative, sales take place when advisors help to build out an exit strategy three to five years in advance. With that much advanced time, our team at ECG can help structure your business to attract the most profitable buyers and create a smooth transition.

If you are starting to think toward retirement or want to give yourself the best option for an exit when the time comes, contact our team today.