You would be hard pressed to find a financial adviser who says it’s OK to have 85 to 90 percent of your assets in one investment.
But often, this is exactly what business owners do when they have 100 percent of their assets on the line with the company.
Risking personal assets this way may be a necessary evil in the beginning growth stages of a company, but once the dust has cleared, it is a good idea to re-evaluate your net worth and its relation to the net worth of your company.
“In most cases, their (the business owner’s) largest asset is their business, and oftentimes, they are looking to diversify and get into new investments,” explains Steven Stiffler, director of BC Corporate Strategies Ltd. a financial consulting firm that specializes in middle-market companies. “The owner may have a net worth of $6 million, but $5 million of it is concentrated in this one area. That constitutes a lot of risk — when the majority of your net worth is at risk in respect to this one business.”
Stiffler suggests cashing out a percentage of the business’s assets. That can involve taking on outside investors, removing capital and replacing it with different equity sources, or even developing a spin-off venture.
The key to a successful cash-out is proper analysis, Stiffler says.
“What is the financial position of the company?” he says. “What are the trends in the industry?”
And, he warns, don’t forget to evaluate the ability of the business to generate income and maintain a positive cash flow.
After a cash-out, you don’t want to leave the company in a position where it is unable to operate. For example, explains Stiffler, “It would not make sense for an owner to take a big chunk out of the company and then need to buy new equipment.”
Instead, analyze the areas within a firm that compete for capital and weigh them against the projection of future cash needs. It’s important to leave adequate equity in the business to continue a healthy cash flow.
Stiffler suggests that when in doubt, always remember the golden rule.
“The golden rule is that a closely-held company is the goose that lays the golden egg,” he says. “And you don’t kill the goose.” How to reach: BC Corporate Strategies LTD, 330-497-2000 or www.brunercox.com
Kim Palmer ([email protected]) is managing editor of SBN Magazine.
