You’ve started a business and have made it through the very tough start up phase. You’ve now created some predictability in your business--now it’s time to start getting some of that value out of the business. This is where you start thinking about diversification, not for safety, but in order to expand the possibilities of what you can do later in life.
Real estate ownership
The first step in harvesting value is often to own the real estate your business occupies. You are paying rent, and if possible, you should pay that rent to yourself. We often see that when the owner of the business leaves their business, the rental income their building produces is worth more than the business itself.
401(k) plan
For many business owners, the next logical step is to look at their 401(k) plans to make sure they are putting the maximum away for themselves. If you are already putting 3% into your plan for your employees; you can often increase the amount you are putting away for yourself. If you can add another 2% for your employees, you can often save as much as $50,000 for you and your spouse on an annual basis.
Strong savings in your 401(k) plan often can make the difference between leaving your business on your terms or having to go to work for somebody else after you sell or close your business. We call this strategy pre-funding your buyout.
Managing Debt for other Investments
Understanding how debt works and why it is important to have enough--but not too much—cash in your business helps you find the cash for diversification into other investments. Those other investments could be a Roth IRA, stocks, bonds, other investment real estate or even passive interests in other businesses. Money that you are leaving in your company could keep you from profiting from other opportunities. Your business is a great value generator, yes, but what other opportunities are you passing up?
You need to do an opportunity cost analysis of leaving cash in the business versus using that cash for other investment opportunities. First, you must make sure your company balance sheet is solid. Most business owners have this instinct. But once that is accomplished, leaving more cash in the business can be damaging, sometimes very damaging.
The purpose of harvesting value is to provide options for the future. You have a nice lifestyle that allows you a good standard of living. You want to protect that lifestyle in the future. Diversification can add options and that is what harvesting value is all about.
Selected Tools:
Owning the Real Estate Your Business Occupies
401(k) Plan for your Employees and You
Stay Bonus
Key Employee Bonus Program
Articles
Increasing the Value of Your Business
Changing Your Relationship with Your Business
Seven Steps to Leaving Your Business in Style
The above tools, techniques and resources are listed as examples. Your Stage2 Advisor will work with you to identify the right strategies for you depending on your specific life goals and financial goals.