Business Owners Understanding the Wealth Gap

Business owners are often consumed by the daily demands of managing their enterprises. As a result, many may find themselves entrenched in short-term priorities, overlooking the broader strategic considerations of their company's long-term value and personal financial aspirations. Not surprisingly, a significant portion of business owners have not proactively planned for the eventual transition or exit from their businesses.

According to the 2023 National State of Owner Readiness Report by the Exit Planning Institute, nearly 40% of business owners lack an exit plan or transition strategy reviewed by a financial advisor. Many of these plans, if they exist, have not been reviewed by the business owner’s financial team (CPA, estate attorney, wealth advisor, business/M&A attorney, business valuation expert, investment banker), and many owners have not yet formed a team.[1] This lack of foresight poses a significant risk, potentially leaving the business owners unprepared for their future.

We believe business owners should have a clear plan for when they want to sell their company and how much they need to sell it for. This is where the wealth gap becomes important.

The wealth gap addresses a key question:

How much post-tax liquidity does the business owner need to extract from the company upon sale to maintain their desired lifestyle, and how does that value compare to the business owner’s current financial position?

If there is a deficit, that is the wealth gap. Put another way, what is the enterprise value of the company that affords the business owner the ability to retire, compared with the current enterprise value of the company? We believe business owners should have a current financial plan that indicates what dollar amount the company needs to pay the owner upon sale, after taxes, to ensure they won’t outlive their wealth during their lifetime.

Understanding the wealth gap is pivotal for business owners as a tool for a possible way they should think about the value of their business. A focus on business enterprise value, rather than cash flow, is an important step in creating significant wealth. The financial plan provides a tangible figure that underscores the gap between current financial standing and desired wealth objectives. Often, this figure may initially seem daunting, potentially leading to a belief that the goal is unattainable without significant adjustments.

Here lies the pivotal insight:

to bridge the wealth gap, owners must think strategically to extract value from their business. By recognizing the need to pull wealth from their business, owners can reframe their approach to business management and financial planning. Viewing the business as a vehicle for wealth generation, rather than a source of income, opens new avenues for decision-making and value realization.

Have you identified what you truly need to live your life the way you want? Do you know if you have a wealth gap? A financial plan, in coordination with a focus on building enterprise value, may offer renewed clarity in what is required to successfully exit the business.

[1] Exit Planning Institute 2023 National State of Owner Readiness Report