How do we calculate our personal wealth gap versus our company's current enterprise value, and how should that math dictate the timeline of our exit runway?

Question

Tyler Smith · Accepted Answer

Most owners approach exit planning backwards. They pick an arbitrary sale date, ask what their company is worth, and hope the net proceeds fund their future. This approach often leads to failed deals when the owner realizes too late that after taxes, transaction fees, and debt payoff, the net cash is insufficient to support their lifestyle.

Your exit runway must be dictated by your personal wealth gap math.

- Calculate liquid net worth outside the business: Tally your personal savings, real estate investments, and retirement assets that exist independently of your operating company.
- Define your post-exit annual income requirement: Determine the realistic annual budget required to sustain your lifestyle after leaving the company, factoring in inflation, taxes, and healthcare.
- Calculate the wealth gap: Using a standard safe withdrawal rate of three to four percent, determine the total liquid capital needed to yield that annual income. Subtract your outside assets from that figure. The remaining number is your wealth gap: the exact net post-tax cash you must walk away with at closing.
- Back into required enterprise value: Work with an exit advisor to translate that net number into a gross transaction value, accounting for federal and state capital gains taxes, advisor fees, working capital requirements, and debt settlement.

If your current enterprise value falls short of that number, your exit runway is not one year; it is three to five years of disciplined operational growth to build sufficient enterprise value.