When your company value makes up most of your net worth.
Here’s what you should know…
When you started your business, its value was probably negligible.
Unless you purchased or inherited your company, it probably wasn’t worth much when you opened your doors.
Over time, however, the proportion of your assets tied to your business has very likely crept up.
While we are always taught to diversify our investments. Many business owners have a significant percentage of their net worth tied up in the business.
If you are in this situation, here are some risks and scenarios that you might want to think about…
Meet Tom Age 30
At 30, Tom starts his company. He has a little bit of equity in his first home and a small retirement fund. When he starts his business, it’s really not worth much, so it doesn’t yet factor into Tom’s net worth calculation.
Now Here’s Tom Age 60
By the age of 60, Tom has built up $1,200,000 worth of equity in his home, his retirement nest egg has grown to $650,000, and his business has blossomed and is now worth $6,000,000.
Tom has always known that the first rule of investing is to diversify. He’s been careful to do with his retirement account.
BUT Tom has failed to achieve overall diversification given the success of his business.
Tom’s company has crept up to represent over 75% of his net worth.
Do You Know Your Freedom Point?
“The Freedom Point,” is when the net proceeds (i.e. after taxes & expenses) of selling your business would garner enough money to live comfortably for the rest of your life.
Your lifestyle determines your Freedom Point, but when you pass it, you should consider the risk you’re taking.
Let us illustrate this in more detail…..
Tom Aged 70
Here’s Tom in Scenario 1
In this scenario, Tom held on to his business. But at the age of 65 he experienced a concerning health issue which took his focus away from the business. This series of events led to a downturn in the performance of his company. Where he once imagined selling and living a comfortable retirement, he now has a lot of uncertainty and potential risks on his doorstep.
Here’s Tom in Scenario 2
In this scenario, Tom had an exit plan in place and had been getting his business ready for some time. Once Tom hit his Freedom Point, he recognised that hanging on too long presented the risk of diminishing returns. Instead, he sold his business for the ideal amount and has now reinvested his capital to provide him with a passive income in retirement.
How Much of Your Net Worth Is Tied to One Asset?
When your business makes up most of your net worth and selling it would garner enough money to retire, there’s no financial reason to continue owning your business.
You may enjoy the challenge, social interactions, and creative process of building a business, but keeping it may be unnecessarily risky.
If Tom’s story resonates with you, and you would like to discuss options for an exit plan.
We’d love to start a conversation!
Would you like more insights like this? Subscribe to Exit Advisory Insider