When was the last time you considered the portion of your net worth that is tied to your business? When you first started your business, it was likely negligible. Unless you inherited or purchased the company, you had to build its value over time.
Over time, most business owners experience that 80% of their net worth is tied up in their business. I wrote another post about diversifying your assets outside of your business (https://northgabusinesscoach.com/diversify-your-assets/), this article is going to be about what to do when you’ve grown it enough to retire.
Everyone knows to diversify your assets, and most of us do for our personal or retirement assets, but our business is different. How do you diversify a business? Imagine a scenario where you have $600,000 in home equity, $400,000 in retirement assets, and a $4,000,000 business. Even if your $400,000 is diversified, that’s only a fraction of the diversification that’s needed.
What’s more, you may have unknowingly passed something called “The Freedom Point,” which is when the net proceeds (i.e., after taxes and expenses) of selling the business would garner enough money to live comfortably for the rest of your life!
Once you pass the Freedom Point, you are now taking more risk. If another pandemic or recession were to hit, your business may take a huge hit or close up altogether.
So how do you diversify your business? There are three options:
- Sell a minority stake: In this scenario you’d sell less than 50% of your company, likely to a private equity group or other financial investor. They want you to continue running your business, and you remain in control. You can diversify out of your business a bit and keep on working.
- Sell a majority stake: This scenario is similar; the investor wants you to keep running the business so that it continues to appreciate for several years. They’ll eventually sell the company, and with your remaining shares you’ll get another nice payday.
- Sell the whole company: Lastly, you could sell the company completely. There will be an earn-out period where you continue to work the business for a specified amount of time, the average is three years.
It’s important to consider how close you are to the Freedom Point. If you’d be open to stepping away from your business in a few years, you have some great options.
If you aren’t sure what your Freedom Point number is, there are two ways to go about it, a rough calculation, or a detailed financial/retirement plan. We can help you with either of these, so please don’t hesitate to reach out!