Freedom at Last: Getting to your Freedom Point!Submitted by Business Owner Succession Strategies on April 5th, 2021
Two questions: What’s a Freedom Point and what’s YOUR Freedom Point?
The Freedom Point = when you have enough money to fund your retirement objectives.
Getting to your Freedom Point is a function of your current business value and savings, how much you need, and when you will have enough value and savings to have the freedom to exit your business. Exit Planning* is about the process you go through in an effor to find your Freedom Point.
The calculation of the Freedom Point is the point where you have saved enough money, together with the net sale proceeds of your business to fund your retirement. To know this, you first need to know how much you will need! This is not always readily apparent to a business owner, and a Certified Exit Planning Advisor can help. For the purposes of this article though, let’s assume an analysis has been done and it has been determined you need $12,000 a month to come from your portfolio, and that you will need the money to last 30 years. Let’s assume that the business owner has $1,000,000 in their retirement account at retirement. How much will the owner need to net from the sale of the business to get to the Freedom Point?
Assuming the owner has capital gains taxes and other selling costs that amount to 30%, the owner needs to sell the business for about $5,400,000. In this hypothetical example, after the selling costs and taxes, the owner nets $3,780,000 from the sale of the business. Add to that the $1,000,000 in the retirement account and you have about $4,800,000. To fund a 30-year retirement with the highest confidence, the business owner takes out 3% from the invested nest egg each year, or $144,000/year, or $12,000 per month.
To have a successful retirement, the business owner in this example will need to get the business in good shape to be attractive enough to sell for $5,400,000 by retirement time. This calculation puts together the three elements of the Exit Planning stool: financial readiness (having enough to fund retirement), personal readiness (knowing what you want to do in retirement and how much it costs), and business attractiveness (getting your business attractive enough to a new buyer so it can be sold for what you need to get.)
Knowing what your business is worth today and knowing what it needs to sell for in the future are two critical points – if you know these two numbers, and apply a growth rate, we can
calculate the time frame to get to this point. If the business is worth $4,000,000 today in this example and needs to get to $5,400,000 in the future, and the compounded annual growth rate is 8%, the business owner in this example would get to the Freedom Point in 4 years.
A business owner like this who knows how much they need, how much the business is worth today, and has a clear idea of the current growth rate, can begin the process of Exit Planning and know that the Freedom Point will happen in “3-5 years.” Knowing this is empowerment…knowing this is freedom!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
*Exit planning services are through LPL Financial, a registered investment advisor