to obtain a business appraisal that indicates the likely sale value of the business interest;

to pay for independent advice concerning exit planning and business continuation, including plan design and document drafting;   

to pay for funding, typically in the form of insurance premiums, associated with contingencies such as death or disability.

Returning to the example of Sebastian and his concerns about exiting in a few years, he needs to look at his business not just as his passion, but also as the source of his retirement income and personal wealth. He should use some of the equity in the business to hire professionals who will help him value the business, create an exit and retirement plan, and do so in the most tax friendly manner possible.  

Principle 2. The business owner rarely knows the true potential sale price of the business. Although Sebastian likely knows the value of his business for both banking and tax purposes, he may not have a clue what the business can sell for. Consider this: He wants to have an ongoing retirement income of at least $1 million a year and he thinks his business has a "going concern" value in excess of $25 million. In theory, this plan should be easy to accomplish. The issue, however, is what the business is really worth when it is put up for sale.

If he has a low tax basis in the business, his net after taxes could be much lower. Further, issues such as thin management or bad economic times could force him to sell at a deep discount. A privately held business is a fragile asset. Getting an accurate valuation will not only help Sebastian determine if he can meet his retirement goal; it will also help him and his advisors create ways to secure and even increase the sale value of the business. Just as a home owner invests in new kitchen counters and bathroom fixtures to improve the resale value of the house, so can Sebastian target key business tactics that will help his business become a better buy on the market. From improving his management succession plan to expanding his customer base, a business owner like Sebastian can improve the company's likely sale value.

Principle 3. The owner of a privately held business will probably have to finance some or all of the cost of selling the business. In cases where a privately held business is worth approximately $10 million or more, it is common for the owner to contract an investment banker to either find a buyer or obtain refinancing. In essence, the investment banker, for a fee, will help secure a valuation, assess ways to improve the value, and either locate an outside buyer or find sources of financing. In many cases, the financing is available through both traditional banks and through mezzanine financing (debt financing junior and subordinated to traditional secured bank financing). Beyond banks, there are capital lenders such as hedge funds and private equity firms that are looking for creative places to put money to market.

Consider Sebastian's business. He has three likely buyers for his business: his daughter, his CFO or an outside buyer. Unless Sebastian and his investment banker are successful in finding an outside buyer willing to pay cash, he may do better to finance some of his business and begin an orderly sale of the business internally. With a sale to his daughter or the CFO, it's clear he will have to take back some kind of note for his equity interest.

The financing of the business will help significantly reduce the value of the business, and make the sale more manageable for the buyer. For example, Sebastian might secure a $10 million long-term bank loan and another $5 million in mezzanine financing. Granted, borrowing increases leverage, but it also lowers the value of the business. At a value of less than $10 million, the purchase is more manageable for the inside buyer. Sebastian has in-pocket capital of several million dollars that he can now diversify, plus the promise of ongoing payments from the sale of his business.

A wealthy retiree whose assets are in a large pension account has less to grapple with than a business owner whose assets are not diversified and are tied up in day-to-day operations. As a business owner, Sebastian has many options; they are simply more complex.