Imagine a 61-year-old owner of a $16 million precision machining shop that makes components for medical device companies. On paper, she's done very well. In practice, roughly four out of every five dollars she's worth sit inside the company or the building it operates from. Her plan to build personal wealth before selling the business has mostly been 'the sale will take care of it.' That's a plan with one leg.
I'm Dan Delaney, Founder & CEO of Seek & Find Financial. A big part of what I do is help owners stop treating the business balance sheet and the household balance sheet as two separate worlds. This post is a working checklist. You don't need to do all nine items this quarter. But you should know where you stand on each one.
Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or guarantee against losses. Past performance may not be used to predict future results. Provided content is for overview and informational purposes only, reflect the opinions of the author, and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
This information is being provided only as a general source of information. These views may change as market or other conditions change. This information is not intended and should not be used to provide financial advice and does not address or account for an individual’s circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee. Please seek the guidance of a financial professional regarding your particular financial concerns.
Investment advisory services offered by duly registered individuals through Seek & Find Financial LLC, a Registered Investment Adviser. Licensed Insurance Professional.
Why the business and your household are one picture
Christopher Snider's Walking to Destiny has a chapter on changing your paradigm. One of the shifts he describes is moving from seeing the business as separate from your personal life to seeing it as one connected picture. That shift sounds obvious. Most owners don't live it.
Snider also talks about the three legs of the stool: the value of the business, whether you're personally and financially prepared for what's next, and a real plan for your life after you stop running things. This post is about the second leg. It's the one owners neglect most, because every dollar they keep outside the company feels like a dollar the company didn't get.
Here's the checklist I'd walk our machining shop owner through. It works for most owner-operated companies in the $10 million to $20 million range.
A nine-step checklist to build personal wealth before selling your business
1. Put everything on one balance sheet
List what you own and what you owe, business and personal, on a single page. The company, the building, retirement accounts, brokerage accounts, cash, the lake house, loans, lines of credit. Most owners have never seen this page. It's often the most useful hour of the whole process.
2. Measure the concentration
Now divide the value tied up in the business and its real estate by your total net worth. If that number is above two-thirds, your financial future depends heavily on one buyer, one market and one moment in time. That's not a crisis. It's a starting point.
3. Find out what your household actually spends
Not what you think you spend. What actually leaves your accounts in a year, including what the business quietly pays for today. The truck, the phone, the club dues, the health insurance. After a sale, those become personal costs. Knowing your real number tells you how much wealth you need outside the company to feel safe.
4. Pay yourself on purpose
Many owners take whatever's left after the business gets what it wants. Flip that. Decide each year how much profit leaves the company for your personal balance sheet, then let the business plan around it. Your CPA can help you think through how distributions and compensation work for your entity type.
5. Use the retirement plan the business can sponsor
A well-designed company retirement plan can be one of the more efficient ways to move money from the business to you over time. IRS Publication 560 lays out the plan types available to small businesses. Which one fits depends on your payroll, your age and your goals, so it's worth a careful conversation rather than a default choice.
6. Build a liquid reserve that belongs to you
Keep a meaningful cash and investment reserve outside the company. It does two jobs. It protects the household if the business has a bad year. And it gives you the freedom to walk away from a weak offer, because you aren't depending on the deal to pay your bills.
7. Look at the real estate on its own
Our machining owner owns her building through a separate entity, which is common. That building could be sold with the business, kept and leased to a buyer, or sold separately. Each path creates a different kind of personal wealth. Work through it with your attorney and CPA well before a buyer starts asking.
8. Shrink the personal guarantees
Many owners have personally guaranteed equipment loans, leases and credit lines. Those guarantees tie your household to the company's risk. Over time, ask lenders what it would take to release or reduce them. Every guarantee you remove makes leg two a little sturdier.
9. Run the 'no sale' scenario
Ask an uncomfortable question. If the business never sold, or sold for half of what you hope, what would your life look like at 70? If the answer is 'fine, just a bit smaller,' you're in good shape. If the answer is 'I'd have to keep working,' the checklist above is your to-do list.
What this checklist means for a spouse who isn't in the business
Picture the machining owner's husband. He's never worked at the shop. He knows it does well. He has no idea that almost everything they own is tied to it. If something happened to her tomorrow, he'd inherit a company he can't run and a building he doesn't understand.
Building wealth outside the company is partly about protecting that person. Liquid, understandable assets in their own names give a spouse breathing room. Pair that with updated estate documents and enough life insurance to cover the gap, and the household no longer rises or falls with one sale.
For a deeper look at the investing side, our post on wealth building strategies for entrepreneurs covers how owners can diversify gradually. And if you want to see how the pieces fit together year after year, here's how we think about wealth management for business owners.
Pulling it together
None of these nine steps requires selling anything. They just require treating your personal balance sheet as seriously as you treat your production schedule. Do that steadily for five or ten years, and the eventual sale becomes one good option among several, not the single event your whole future depends on.
Frequently asked questions
Won't taking money out of the business slow its growth?
Sometimes, a little. But a company that can only grow by absorbing every dollar of profit has a problem worth understanding. Pulling out a planned amount each year forces sharper decisions about which investments really pay. Many owners find the business adapts just fine.
How much should I have outside the company before I sell?
There's no universal number. A useful target is enough outside wealth that a disappointing sale wouldn't change your basic lifestyle. Your household spending from step three is the starting point for that math.
Is the building part of my personal wealth or the business?
Both, depending on how you plan it. If it's held separately, it can produce rent for you long after you sell the operating company. If it's sold with the business, it becomes part of the deal proceeds. Talk with your CPA and attorney about which approach fits your goals.
Want to know how sturdy your second leg is?
The second leg of the stool is usually the one owners know least about. I'd be glad to look at it with you, along with the other two: what your business could be worth to a buyer and whether you've pictured life after you stop running it. It's a private one-on-one Three-Legs Check. To set one up, send the word STOOL through our contact page, or if you read The Long View, just reply STOOL to any issue. Our clients are typically owners between 45 and 70 whose companies are worth somewhere around $10 million to $20 million, from Valparaiso and Chesterton to the rest of Northwest Indiana and greater Chicago.
Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or guarantee against losses. Past performance may not be used to predict future results. Provided content is for overview and informational purposes only, reflect the opinions of the author, and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
This information is being provided only as a general source of information. These views may change as market or other conditions change. This information is not intended and should not be used to provide financial advice and does not address or account for an individual’s circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee. Please seek the guidance of a financial professional regarding your particular financial concerns.
Investment advisory services offered by duly registered individuals through Seek & Find Financial LLC, a Registered Investment Adviser. Licensed Insurance Professional.
