Editor’s note: This is the second article in a two-part series for business owners. The first article was The Most Important Number for a Business Owner Considering a Sale.
The “wealth gap” is the gap between your current assets and what you need to get from the sale of your business to maintain your current lifestyle. I would argue it’s your most important calculation as you consider selling your business.
Start with what you spend
I recently read an article about a couple in San Francisco living comfortably with a combined income of $200,000. The comment section is absolutely brutal. Anyone who shares their spending habits online is extremely brave. No matter the budget, someone will find a reason to tear your spending apart.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The potential for such criticism can be a major stumbling block for those considering whether to hire a financial planner or anyone starting to figure out what they spend every month. I’m here to tell you it shouldn’t be. You should never be self-conscious about a budget that includes saving every month and is less than you earn. After you’ve hit your saving goals, the money is there to be spent.
At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
OK, now that we’ve addressed the elephant in the room, let’s talk about what you actually spend. There is more and more technology to help you do this, but I have yet to find anything more accurate than what we call the “two-year-statement drill.” Simply look at the total debits across two years of annual bank statements and divide that number by 24. There. You’re done! Yes, that number included a new HVAC system and a family vacation to Europe. But, guess what: You’ll spend that money on something else in the next two years.
Let’s say that number is $20,000 a month.
What you have
This one is simpler but requires clarification. When you talk about what you have, I mean invested assets. This should not include equity in your home or other illiquid assets that you don’t plan on selling.
For many business owners, the vast majority of what they have is tied up in the company. So, once again, this is not something you should be self-conscious about.
What you need
The amount you need, even knowing that you’ll spend $20,000 a month, can vary widely. It depends on:
- Your age. The older you are, the more you can withdraw.
- Risk tolerance. The more aggressive you’re willing to be, to a point, typically the more you can spend over your lifetime.
- Tax rates. This one is sort of obvious.
For the purposes of this article, I am going to meet in the middle for a lot of these numbers. We’re going to use Bill Bengen’s 4% withdrawal research to say you can pull out 4% a year. And we’re going to say, on average, you’re going to pay 30% in taxes on every dollar you pull out.
The wealth gap
Once again, this is basically the gap between what you have and what you need. It is what you need to realize from the sale of your business so that you don’t have to go back to work.
Let’s break it down:
- Monthly spending: $20,000
- Annual spending: $240,000
- Average tax rate: 30%
- Gross amount (pre-tax): $342,857
- Sustainable spending: 4%
- Total need: $8,571,429
- Current assets: $1 million
- Wealth gap: $7,571,429
- Ownership percentage: 80%
- Sale amount: $9,464,286
As you can see, the wealth gap is just over $7.5 million. However, it’s common for a business to have multiple partners, so we went one step further when calculating the sale amount.
Use this exercise as a starting point
This exercise is not enough for you to say, “Let’s do it!” It should give you enough information to figure out if you’re in range based on historical valuations you’ve received. This is what I would do if someone said, “You have five minutes with a prospective business owner client to tell them whether or not they are close to retirement.”
To run the actual calculations, which would include personal tax projections, other goals and other income streams, like Social Security, we rely on software. You can access a free version of the software we use online.
If you’re interested in speaking with one of our planners or our investment bank, you can schedule that here.
Related Content
- Three Key Questions for Small-Business Owners in 2025
- For Business Owners, Estate and Exit Planning Join Forces
- Why Business Owners Should Review Their Buy-Sell Agreements
- The Four Worst Mistakes to Make When Selling Your Business
- How to Score a Hole in One With Your Retirement Planning
-
I missed the 2-Year IRMAA Rule. Now, my Medicare costs are skyrocketing. What are my options?A spike in income could result in costly IRMAA charges on your Medicare premiums. We ask financial planning experts for advice.
-
How to Build Your Financial Legacy Three Piggy Banks at a TimeA wealth adviser shares a childhood saving technique that taught him lessons of stewardship, generosity and responsibility and helped him answer the question we all need to answer to define our lives by impact rather than greed: 'What is this all for?'
-
I Missed the 2-Year IRMAA Rule, Now My Medicare Costs Are Skyrocketing.
A spike in income could result in costly IRMAA charges on your Medicare premiums. We ask financial planning experts for advice.
-
How to Build Your Financial Legacy Three Piggy Banks at a Time
A wealth adviser shares a childhood saving technique that taught him lessons of stewardship, generosity and responsibility and helped him answer the question we all need to answer to define our lives by impact rather than greed: 'What is this all for?'
-
Which of These Four Withdrawal Strategies Is Right for You?Your retirement savings may need to last 30 years or more, so don't pick a withdrawal strategy without considering all the options. Here are four to explore.
-
July CPI Report Ignites a Risk-On Rally: Stock Market TodayMarket participants price out worst-case scenarios for tariffs and inflation and will now turn their attention to employment and growth.
-
July CPI Report Boosts Rate-Cut Odds: What the Experts SayThe July CPI report shows that tariffs are having a slight impact on inflation, though not enough to keep the Fed from cutting interest rates.
-
Don't Be a '98 Pound Weakling' Just Because You're AgingCharles Atlas's tips to the '98-pound weakling' might be the only comic book ads that actually paid off. Swap the X-ray glasses for this healthy habit.
-
DST Exit Strategies: An Expert Guide to What Happens When the Trust SellsUnderstanding the endgame: How Delaware statutory trust dispositions work, what investors can expect and why the exit is probably more important than the entrance.
-
Think Selling Your Home 'As Is' Means You'll Have No Worries? Think AgainThere are significant risks and legal obligations involved in selling a home 'as is' and by yourself, without a real estate agent.
