Achieving financial freedom after you exit your business does not happen without a solid plan. That’s why NAVIX developed the Exit Magic Number™ calculation. It determines the value you need from the business between now and your target exit date to achieve financial freedom. Note that the Exit Magic Number focuses on how much you need from the business, not what your business is worth. This is a different approach from most conventional approaches, which emphasizes getting “maximum value” for the business. Getting maximum value is good and desirable but may not be the most important issue.
There are two reasons why the Exit Magic Number calculation is arguably the most important number in exit planning for closely held business owners. One reason is “defensive” and the other is “offensive”.
What if you succeed in getting “maximum value” but find you are unable to afford financial freedom? Is this a successful exit?
On the defensive side, the issue is simple but critical—if the owner exits for a net amount short of his or her Exit Magic Number, he or she will fail to achieve personal financial freedom in the manner he or she aspires. The owner who falls short must either reduce his or her post-exit lifestyle, take on higher post-exit investment risks than he or she is comfortable with, go back to work, or some combination of the three. Few owners would happily choose this outcome.
Knowing one’s Exit Magic Number allows the owner to take control of the process by making decisions today and at exit that defend against coming up short. For example, identifying the number well before exit helps the owner forecast how big the business must grow to in order to not come up short, and make strategic decisions that drive the business toward the owner’s exit success. In another example, an owner seeking to sell the business can use his or her Exit Magic Number calculation to negotiate the deal terms with an eye towards receiving sufficient cash at closing to reach personal financial freedom. The selling owner who walks away from the closing table with net cash sufficient to achieve personal financial freedom is assured that any additional dollars in the transaction not received at closing and therefore at risk, such as deferred payments, earn outs, seller financing etc., will not compromise his or her financial security.
Playing “offense,” owners who know their Exit Magic Number calculation can take advantage of tactics at business sale that defer and reduce income taxes, estate and gift taxes. Having an accurate estimate of the Exit Magic Number allows owners to consider estate tax sheltering strategies without undermining their future financial freedom.
How Much is Your Exit