I wrote a small booklet entitled The One Percent Solution (click for your complimentary copy) a few years ago at the request of a sales manager at a national insurance company. At the request of a number of financial planners and attorneys, I am revising and updating this booklet for my Kindle series Baby Boomer Business Owner Transition Guides. The first book, Buy-Sell Agreements for Baby Boomer Business Owners, was recently published.
With this post I am beginning the new book, tentatively titled Managing Private Wealth from Closely Held Businesses: The One Percent Solution, and will post additional sections over the coming weeks. When it is complete, the book will be published as an Amazon Kindle book. The gist of the idea behind The One Percent Solution is:
Consider a budget for managing your pre-liquid wealth (defined as your ownership interest in your private company) similar to the fees you pay to manage your liquid wealth (stocks, bonds, other liquid investments).
So, here we go…
Managing Private Wealth from Closely Held Businesses: The One Percent Solution
Owners of successful closely held and family businesses need to focus attention on the management of all of their wealth. For most owners, their wealth comes from two primary sources:
- The value of your interests in closely held or family enterprises. This wealth is, by definition, illiquid, for there are no well-organized markets for the sale of interests in private businesses. Quite often, there is a concentration, even an extreme concentration, of wealth in this illiquid form. While businesses in their entirety can be sold, the decision to sell is often difficult or postponed or ignored or not agreed to by their various owners. Let’s call this type of wealth illiquid wealth. We can also use the term pre-liquid wealth to signify that private wealth may be in the process, even a very long process, of becoming liquid.
- The value of your interests in any assets inherited, earned, derived from distributions or other transactions with their businesses, or otherwise obtained outside your businesses. While such other assets might include real estate and other forms of potentially earning or appreciating assets, most owners attempt to develop portfolios of liquid assets outside their businesses. They do this directly and/or in retirement plans. I and many others call this type of wealth liquid wealth.
The management of liquid wealth is a well-organized industry in the United States. It involves legions of financial planners, tax advisers, asset management consultants and asset management firms. Liquid wealth in the United States totals many trillions of dollars and it must be managed, in many cases for fiduciary reasons.
The management of the illiquid wealth represented by investments in successful closely held and family businesses, on the other hand, is at best a cottage industry in America. In any event, if you are invested in ownership of one or more successful private business enterprises, that wealth should be managed with the same intensity and care and concern as your liquid wealth.
Based on my more than 30 years of working with closely held and family business owners, many of whom are now baby boomers, I conclude that many, if not most owners of successful businesses manage the wealth represented by their investments mostly by chance. There are a number of not-so-good reasons for this:
- It takes time and business owners don’t want to or believe they cannot take the time to do it.
- The belief that managing the business is managing the wealth.
- It is uncomfortable talking to other owners (or a spouse) about wealth management.
- Hesitant to invest to retain competent corporate, tax, accounting, valuation and financial planning advice, or to retain (and pay for) a “quarterback,” or a professional who will facilitate the investment management process.
- The always looming yet never realized plan to work on important management and transitional issues.
- The thought of adding another management process to otherwise full schedules feels overwhelming.
These “reasons” are really excuses and there is no excuse for not managing your wealth in a reasonable and orderly manner. It is a matter of personal and family responsibility. That’s blunt but true.
This new book offers a solution, The One Percent Solution, as a means of focusing your attention on managing what is likely your greatest stock of existing wealth, as well as your greatest source for generating future wealth – your investment in your closely held or family business.
Coming installments of this book on The One Percent Solution will discuss the management of liquid wealth as a backdrop for beginning to consider ways to manage illiquid wealth, compare the magnitude of illiquid wealth to liquid wealth (this will surprise you), outline specific action steps for managing illiquid wealth and more.
In addition, we will discuss how you can use the tools of modern corporate finance currently employed by larger, public firms and private equity firms to enhance returns for your shareholders and to make your company more attractive for sale.
In the meantime, feel free to download the original book – The One Percent Solution. While the new one will be different, the old one is pretty good!
You are always welcome to call me to discuss any business or valuation-related matter in confidence. If you call and I’m not available, we will set up a mutually available time to talk.
Question for You
Regarding the topic of managing the illiquid wealth in your or your clients’ closely held or family business, what questions do you have or what topics would help you the most? Leave your comments below.