You've started a business and have made it through the very tough start up phase. You've now created some predictability in your business--now it's time to start getting some of that value out of the business. This is where you start thinking about diversification, not for safety, but in order to expand the possibilities of what you can do later in life.

In our section on financial planning we talked about the kind of diversification that allows you to leave your business. Now we are going to talk about some of the strategies that you can use to extract cash from your business, right now while you are still actively engaged in it.

Buy some real estate
The first step in harvesting value can be to own the real estate your business occupies. You are paying rent, and if possible, you should pay that rent to yourself. We often see that when the owner of the business leaves their business, the rental income their building produces can be worth more than the business itself.

You will need to take some money out of your business for your down payment. You will also want to have the building amortized for no more than fifteen years. This will allow you to have a building with no mortgage and plenty of cash when it comes time to leave your business.

Look at your 401 (k) plan
For many business owners, the next logical step is to look at their 401(k) plans to make sure they are putting the maximum away for themselves. If you are already putting 3% a year into your plan for your employees; you can often increase the amount you are putting away for yourself. If you can add another 2% for your employees, you can often save as much as $50,000 for you and your spouse on an annual basis.

Strong savings in your 401(k) plan often can make the difference between leaving your business on your terms or having to go to work for somebody else after you sell or close your business. We call this strategy pre-funding your buyout. Many businesses have little or no market value when it comes time to sell. But if the owners pre-fund their buyout with present cash, they are are able to set their own terms when it's time to leave the business.

Managing Debt for other Investments
We already have covered managing the amount of cash and debt you have in your business. Understanding how debt works and why it is important to have enough--but not too much-cash in your business helps you find the cash for diversification into other investments.*

Those other investments could be a Roth IRA, stocks, bonds, other investment real estate or even passive interests in other businesses. Money that you are leaving in your company could keep you from profiting from other opportunities. Your business is a great value generator, yes, but what other opportunities are you passing up?

You need to do an opportunity cost analysis of leaving cash in the business versus using that cash for other investment opportunities. First, you must make sure your company balance sheet is solid. Most business owners have this instinct. But once that is accomplished, leaving more cash in the business can be damaging, sometimes very damaging.

The purpose of harvesting value is to provide options for the future. You have a nice lifestyle that allows you a good standard of living. You want to protect that lifestyle in the future. Diversification can add options and that is what harvesting value is all about.

As always, please give your Stage 2 Advisor a call with any questions or comments you might have. We would be glad to work with you on finding some strategies that would help you harvest value and add options to your financial life.


*Diversification does not guarantee against loss. It is a method used to help manage investment risk.

With warm regards,

Stage 2 Planning Partners

Josh Patrick © 2007

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