Shortly after the turn of the century (!), I started work on my first book on buy-sell agreements. That book, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions?, was published in 2007.  That same year I gave a major presentation on the topic at the annual conference of the Business Enterprise Institute in Denver.   It was fun and I received several additional invitations to speak afterwards.

During that almost two-hour presentation, I provided two slides on an idea I called “The One Percent Solution.”  I developed the term as a vehicle to talk with clients about the value of valuation and other financial and estate planning activities conducted to manage (pre-liquid) private company wealth.  The gist of the idea is simple:

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).

When thinking about investing to manage your pre-liquid wealth, consider how you likely manage your liquid wealth:

• Holders of liquid wealth, including stocks of public securities, bonds of many kinds, securitizations of assets and other assets with active or relatively active markets tend to place them “under management” with financial planners, money managers, investment advisers or other professionals who manage their wealth actively.
• Asset managers charge fees for their services. Equity managers might charge 100 basis points, or 1%, of assets under management. Bond management fees tend to be lower, say from 20 to 50 basis points or so.  And private equity, venture capital, and hedge fund fees tend to be higher, perhaps 1.5% or higher.
• If you have a million dollars in managed, liquid funds, even in your company’s profit sharing plan, you are likely paying fees of 75 to 100 basis points for the services of your asset managers.  You and I and almost everyone else with significant liquid wealth does the same thing, so on your million dollar account, you are likely paying fees of perhaps $10 thousand, or say 1% of “assets under management,” or AUM for short.

Pre-liquid assets either become liquid or facilitate the creation of liquid assets when they are sold (entire businesses or partial sales) and when they distribute cash to their owners. Do owners of privately owned companies typically thing about their pre-liquid assets as investments? Not if our experience is representative. This leads us to The One Percent Solution.

The One Percent Solution Defined

So what is The One Percent Solution?  Consider 1% of the wealth tied up in your (or your clients’) private businesses as the starting point for discussion for the budget for managing that wealth.  So if a closely held or family business is worth $20 million, the budget for managing that wealth might be about $200 thousand, or about $100 thousand if you use 50 basis points as your “management fee” percent.

The Booklet

During that speech in 2007, I said no more than what I’ve written above about The One Percent Solution.  However, a few months later, I received a call from a sales manager with National Financial Partners. I thought he was going to ask me for a repeat of my buy-sell agreement presentation.  While he found that talk very helpful, he was most interested in a one-hour presentation on, you guessed it, my two slides regarding The One Percent Solution.

I delivered that presentation and also wrote a booklet on the topic for each financial planner at the conference. That booklet is available today as a complimentary pdf download. Financial planners have purchased the book in bulk to give to their clients and I have given a number of speeches on the topic.

A New Book In New Series Is Coming

Because I am a member of the baby boomer generation and because I am a transitioning business owner, I am keenly interested in succession planning for baby boomer business owners. As such, I have begun a new series of Kindle books. The series is entitled The Baby Boomer Business Owner Transition Guides. My first book in this Kindle series was recently published: Buy-Sell Agreements for Baby Boomer Business Owners. It is my third book on the topic of buy-sell agreements. It is a condensed and generationally focused version of my 2010 print book, Buy-Sell Agreements for Closely Held and Family Business Owners.  

At the request of several financial planners and attorneys, I am in the process of revising and expanding the original The One Percent Solution (available as a complimentary pdf download).  You can follow along because I will be writing installments on the topic for the blog as the new book develops. The new book will be the second book in The Baby Boomer Business Owner Guides series.

Conclusion

If you have ideas or thoughts you would like to share about managing private wealth, please feel free to call or email me.  I’d love to hear from you and consider your ideas as the new The One Percent Solution progresses.