We live in the greatest country in the world! As we prepare to celebrate Independence Day, I thought it would be an appropriate time to reflect upon how fortunate we are to be Americans. Each day when we wake up, we have the freedom to choose how we will invest our time, talents and treasure. Thanks to God and our fellow Americans who have gone before us and who have made the ultimate sacrifice to provide us this luxury, we have the ability to make choices each day.  Some of us choose to invest our time, talent and treasures pursuing the American Dream by working for others while some of us choose to build businesses to provide opportunities for others and in an effort to achieve financial freedom and independence. Achieving financial freedom and independence is a challenging endeavor that requires focus, commitment and discipline.

What is financial freedom? Financial freedom implies that one has enough income to maintain their standard of living and therefore has the ability to pursue other interests outside of employment.  Financial freedom in the context of business succession means accumulating enough liquid resources independent of the business whereby you are not financially dependent upon the business to maintain your standard of living.  As a business owner in a family business setting, why is attaining financial freedom so important?

Many successful business owners who have dedicated their lives to building their businesses reach a point in their career where they recognize the importance of “passing the torch” to a next generation family member or to a qualified, competent key manager. Developing wealth independent from the business is no easy task but it is paramount to an effective business transition. Having peace of mind that your financial security is not dependent upon the future success of the business will provide peace of mind and also afford you the opportunity to transfer some managerial and leadership responsibilities to your successor. In essence, it allows you the opportunity to see your successor in action and determine if and to what extent additional coaching and mentoring may need to take place in order to give you confidence your business legacy can be perpetuated.

Let’s look at a few examples to help illustrate this point:

Scenario #1:

John, age 65 was the founder of a manufacturing business in the Northeast. Over the years, he continuously reinvested the profits of his business back into the business and as a result ended up “having all of his eggs in one basket.”  John worked tirelessly for decades and reached a point where he had had enough. His energy and enthusiasm for the business was dissipating and he was ready to step away from the business and let his son, Jimmy, take over the reins. The only problem was that John’s business represented ninety percent of his net worth and he had not done a very good job of involving his son in important business decisions over the years. John lived in an upscale community, was a member of two golf country clubs and was accustomed to traveling overseas a few times per year. In order to maintain his standard of living, John needed $200,000 of after tax income.  He had accumulated a modest investment portfolio but it was not capable of producing enough income to maintain his lifestyle. Although he made every effort to transition the management of the business to Jimmy, John was always second guessing the business decisions Jimmy made. Naturally this frustrated Jimmy and began to create family issues between father and son. Needless to say, Mom was not very happy as this business issue started to impact family time together.  The bottom line is that John was not able to withdraw from the business because he was dependent upon the business financially.

Scenario #2:

Sam, age 60 also worked tirelessly for decades and reached a point where he was ready to step away from the business, at least from an operational perspective. Sam enjoyed spending time with his grandchildren and was an avid boater. He also lived in an upscale community and owned a home at the beach where he spent long weekends.  Unlike John in the above scenario, Sam had been very intentional in creating a healthy balance between reinvesting in the business and also building meaningful investments outside of his business. When it came time to step away from the business, Sam had very little trouble because he had built a comfortable nest egg that was more than capable of providing the income he needed to sustain his current lifestyle. Furthermore, he had gradually increased his son’s role in the business over the past five years which made Sam’s transition out of operations much easier.   As a result, Sam and his wife were able to experience financial freedom from the business and do the things they always wanted to do: spoil their grandchildren and enjoy time on their boat at the beach.

 Many of my most successful clients have built thriving family businesses as well as amassed impressive personal wealth with investments in real estate and in the stock market. When a business owner can retire and hand over control of the business to their successor without having to rely on income from the business, it enables the owner to step back and not feel the overwhelming pressure to stay involved in the business to ensure it will continue to succeed.

Consider the following for accumulating wealth independent from the business:

  1. Define what financial security means to you. I have encountered individuals who have modest net worth and feel financially secure as well as individuals with significant net worth who grew up in the depression and are fearful they will be financially dependent upon their children. What does financial security mean to you?

  2. After you have defined financial security, develop a specific game plan to achieve your financial security goals and build liquid net worth independent from the business. In other words, “don’t put all of your eggs in your business basket”.

  3. Develop a relationship with a trusted investment advisor.

  4. Activate your plan. 

 If you have the opportunity this Fourth of July to enjoy a picnic or watch fireworks with family and friends, take some time to be thankful for the incredible privilege of living in the United States of America. Consider revisiting your personal financial plan with your team of advisors to reconfirm your goals and objectives and determine what it will take to accomplish them. Making sound financial decisions today will increase the likelihood you will have financial freedom in the future. You too, can enjoy the fruits of your labor! Happy Independence Day, America!

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