How much is enough? Finding the magic number for business owners
As business owners approach major life milestones, they all need to answer the same high-stakes question: how much is enough?
By Christoff Boshoff and Myron Uhryn, MBA, CEPA, FEA, CIWM 4 November 2022 4 min read
About 10 years ago, Myron Uhryn sat down with a client for a pivotal conversation.
“He was looking at selling his company, which he’d grown into a multimillion dollar business,” says Myron , a senior financial advisor at ATB Wealth with a special focus on business owners. “He was trying to decide whether to exit now for $30 million or wait with a longer closing date on the deal for around $60 million instead.
“We talked it over and I asked him: if you can’t be happy with $30 million, will you be happy with $60 million?”
As business owners approach major life milestones like retiring or selling their current business to move on to a new chapter, they will face high-stakes questions like this. Fundamentally, such questions are all variations on the same one: how much is “enough”?
And while each business owner’s answer to that question will be unique, there are common best practices for arriving at the right answer for you.
The power of precision
Business owners are generally a numbers-minded lot. But after years of working closely with them, Christoff Boshoff, also a senior financial advisor with ATB Wealth, has identified a common blindspot.
“The business owner typically underestimates how much the business pays for in their personal life,” says Boshoff, who has also started several businesses himself. “It can include the family cabin, a company car, insurance, and much more. The business of one recent client supported a sports club that was very close to his heart.”
Underestimating what the business pays for can make projections of post-business income needs inaccurate.
At the same time, human beings, including business owners, have a tendency to overestimate how much money they’ll need in the future.
“Behavioural finance tells us that there’s a factor of 10 for how much people think they’ll need to feel secure,” says Uhryn. “If you ask a person with $10,000 how much money they need to feel secure, they’ll say $100,000. Ask someone with $100,000, they’ll say $1 million. Someone with $10 million will say they need $100 million. So it tends to scale.”
The best way to avoid these common planning pitfalls is to make a detailed plan about life after the sale of your business.
“Design your ideal future and ask: how much is it going to cost?” suggests Boshoff. “The more granular you can get, the better.”
An advisor who knows what questions to ask can be invaluable in crafting a reliable and robust budget for a business owner’s next chapter.
“Retirement plans are often fuzzy,” says Boshoff. “Say you want to travel or golf. OK. Where? How often? Are you flying? First class or business? Where are you staying?
“Part of this is the cost side and part is getting the client to really decide what they want to do. People generalize about retirement. It’s our job to have good, specific conversations about what life will be like going forward.”
Try before you buy
In that spirit, it can also be very helpful to “test drive” a retirement budget and plan before the rubber actually hits the road.
“If you want to travel in retirement and stay somewhere for three months of the year, go test it,” says Boshoff. “Set up the business to run without you—which you’ll need to do anyway for the sale—and go rent the place in Mexico for three months before you buy it.”
A test-run like this can help a business owner know if they actually like their retirement plan or only the idea of their retirement plan. It can also help determine the accuracy of any budgeting assumptions.
Look back to see ahead
No one knows the future, but creating a plan today requires making predictions about tomorrow.
From a financial planning perspective, one of our best guides through this uncertain terrain, says Uhryn, is careful analysis of the past.
“We look a lot at history to make projections,” he says. “If you look at the last 150 years of interest rates, they’ve been around 2% on average except for the ‘70s. In that environment, we can usually project a rate of return around 4% without going into principal with about 95% probability.”
Consistent updating can also help a financial plan cope with uncertainty.
“The first thing to know about your withdrawal plan is that it’s wrong,” says Boshoff. “There are three reasons for this. The first is that we can’t know your exact rate of return. The second is that it’s impossible to know what inflation will do. The third is that you don’t know how much you will spend in the future.
“So your plan is always in draft form. The way to account for this is to be conservative in your projections and recognize that your plan always needs to be redrafted and updated and brought back to reality.”
Give it time
Getting ready for life after the sale of your business, much like the sale itself, is not an overnight process. Time spent on your plan is an investment, and like any investment, the earlier you begin, the better.
“It’s important to ask ‘how much is enough?’ before you’ve had enough of your business,” says Boshoff. “The earlier you ask, explore, and iterate your answer, the better.”
Financial planning for business owners
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