Jeremy owned a large long-distance trucking company. He founded the business nearly twenty years earlier. Jeremy was only 53 when we met him for the first time, but he looked at least ten years older.
“I’m tired,” he shared during the meeting, and he looked it.
Jeremy had sold his business three years earlier to his long-time minority owner Dale. Dale had tried his best to carry on the business, but Dale either was not prepared or not capable. Dale fell so far behind in the payments that he was forced to return the business to Jeremy. Now Jeremy was rebuilding just to get the business back in the black, and he had no idea how long it would be before he could try to exit again.
Employees usually have little cash and little ability to raise cash on their own. Innies (business owners who plan to exit by selling to employees) usually need to help their employees buy the business, either by taking paper at sale (commonly called owner financing), pledging the business as collateral against a loan, or both. The risks are clear. If the business falters after exit, the employees (who have become the owners) may be unable fulfill their obligations. If the business fails, financial freedom and the business legacy may be lost.
A low or zero Exit Magic Number (the value one must extract from the business in order to achieve financial freedom) reduces financial dependency on the business, which increases the flexibility to balance an owner’s wishes against the business’s capacity. For example, if an owner wants to sell to employees, but that owner has relatively little wealth outside of the business, he probably needs to get paid a large amount up front. This strains the company’s cash flow, potentially to the breaking point. With some wealth outside the business prior to exit, one is free to consider options that accommodate the business’ financial resources. Reducing taxes can reduce default risk because fewer dollars are sent to the government. An orderly transfer of control potentially smoothes transitions and increases everyone’s confidence of success.
