Architecting Your Multimillion-Dollar Exit
Architecting Your Multimillion-Dollar Exit
How can business owners create a strong financial plan?
This relates to both financial planning and estate planning. While I'm not a financial planner, I do teach a financial planning course at George Mason University. Here's how I see it: you need to have a financial plan for yourself and your family. If you have employees, you need to plan for their well-being as well. If you care about your business, you’ll care about your employees, and that means setting up structures so they can save for their future too.
It’s important to plan for the exit from the very beginning. Stephen Covey talks about this in his book, The 7 Habits of Highly Effective People—you need to have a plan in place early. This might mean setting aside $1,000 or $10,000 a month into savings so that if something happens, you're prepared in the short term. It's also about thinking ahead—getting life insurance, disability insurance, and other protections in place.
I don’t sell these products myself, but I refer clients to experts. It’s crucial to view this as risk management: you’re managing the risk of an early death, disability, or other events. You also need to ask yourself what you want from your business in the long term. It all starts with structuring the business properly from the beginning.
Setting up an LLC is easy—you can do it online in minutes. But that’s not the point. The question is: how do you set it up for tax purposes? How do you take care of your employees, yourself, and your family? How do you incentivize employees to stay as the business grows? Because, eventually, others will be crucial to the success and exit of the business.
There are many factors to consider. It’s not just about tax planning or estate planning. You need to plan the business structure correctly so that when you exit, you've maximized its value. Along the way, there are value drivers you can enhance that you might not be focusing on. An exit planner, like me, can help identify those value drivers and articulate the current value of your business.
Then, we can work on growing that value so that you can exit the business successfully, whether that means transitioning it to your family, key employees, or selling it. Whatever your exit strategy is, you should have one and be thinking about it from the very beginning.
What estate planning strategies protect family wealth from taxes?
Here’s an important example, commonly used by high-level estate planners and one that I’m currently working with. Let’s say you’re starting an investment fund, perhaps a hedge fund, and you’re doing it legally with the help of a great advisor. The fund is growing as you take in outside money.
I was recently talking to a young guy who wants to build a hedge fund. How do we plan for the ultimate success of the fund while minimizing the impact on his family if something happens to him or he passes away? If the fund grows to $250 million and no estate planning is in place, his family could suffer greatly. Upon death, from a federal perspective, they would face a 40% tax, meaning $100 million would immediately go to the IRS.
While I understand the necessity of taxes, it’s concerning when families lose that much wealth to taxes. So, we create structures to prevent this. One structure we use is a derivative strategy. It sounds complex, and it is, but essentially, you sell an option to a trust you’ve created for your family. This trust, known as a generation-skipping transfer tax-exempt trust, or dynasty trust, can last for generations.
By selling an option to transfer the future upside of your business or investment to the trust, the cost is a fraction of what the interest is worth. The trust needs enough funding to pay for the option, usually through a small cash payment and a promissory note. The trust might be treated as yours for income tax purposes but as your family’s for estate tax purposes. This means the assets grow estate- and gift-tax-free outside of your estate, saving 40% per generation.
Why must business owners align marketing strategies with their niche?
Bad decisions happen to everyone. Does an extreme planner like me make bad decisions? Well, I didn’t become an extreme planner until the last 15 years or so. Before that, as a lawyer, I didn’t focus on planning. It was more about getting the next billable hour.
One decision we made recently that wasn’t great was trying to outsource some of our marketing. The goal was to bring in more clients without relying solely on my personal efforts. We hired an outsourced marketing firm, and while it may have worked for other clients, it didn’t work for us.
Our practice is very niche. We primarily serve entrepreneurs, founders, and CXOs who are focused on growing their businesses. We also do estate planning for a variety of clients, but our expertise lies in helping business owners with estate, business, and tax planning all at once. The firm we hired just didn’t align with the specific needs of our business.
*This interview has been edited and condensed for clarity.*
