Financial planning should be the starting place in a wealth management process for any private business owner. In this important preparatory stage, the owner figures out how much they need to live their daily life, plans for life stage expenses such as educating children, and explores what they will need when it comes time to leave the business.

We have a tool we use with our private business owners called the Four Boxes of Financial Independence. This tool helps you, the private business owner, understand where your income will come from when you stop working.

The four boxes are:

• Your business
• Investment real estate from which you operate your business
• Your 401(k) plan
• Your other investments

When we start a conversation with many business owners we ask the following question: When would you like to stop working ? If the owner is over fifty years old we often hear five years as the ideal time frame for leaving the business. Usually the owner doesn't know if they can afford to leave by then, but they have a sense that things will be different five years into the future, that they will have accomplished whatever it takes to leave the business, even if they don't yet know that it will take.

We often work with business owners to understand that for them to be able to leave the business when they want, they need a plan. And that plan will require diversification in investments outside of the core business. It is frequently the case that the core business won't provide enough income after a liquidity event (sale or liquidation of the business) has happened. For example, a business that provides $200,000 per year for the owner while it's operating will usually provide only 20% of that income after it's sold.

A buyer will often pay between three and six times earnings for your business. In the case above, this would provide the owner with $600,000 to $1,200,000 in capital before taxes. If we deduct 20% for taxes, we would be left with $480,000 to $960,000. Many financial planners think that a safe withdrawal rate from an investment for retirement is about 4% of the capital. Under the described scenario, the owner would be able to spend between $19,000 and $38,000 per year--far less than the $200,000 per year they were spending when they ran the business.

This means that our owner needs some other strategies to help them reach retirement income goals. Combining a regular savings plan with real estate ownership is often enough to help the owner reach financial independence. It is not critical that the business owner fill every box, but diversification into three of the four enhances the likelihood of reaching financial independence in retirement.

Having a personal business plan-a plan that starts with the Four Boxes-- is just as important as having a plan for your business. Many businesses and their owners do a good job planning for their business. They understand where the sales will come from and what expenses they will accrue during the year. They know how much capital they will need and where that capital will come from.

Those same owners often don't do any personal planning. Using the four boxes helps the owner provide a business plan for themselves as individuals. Having this personal plan in place will help you as a business owner understand whether your business can help you reach outcomes that are important for you.

Our Four Boxes tool is part of our Objective Review discovery process. We believe that if you don't do anything else, starting with a personal wealth plan lets you know whether the other things you are doing in your business and wealth accumulation activities make sense.

For more information on the Four Boxes of Financial Independence or our Objective Review process, please contact us at Stage 2 Planning Partners. We would be glad to help you through this process.

With warm regards,

Stage 2 Planning Partners

Josh Patrick © 2007

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