What is financial freedom? In the context of business succession, financial freedom means accumulating sufficient liquid resources independent of the business whereby the owner doesn’t have to rely on business profits to maintain their standard of living.  Why is attaining financial freedom so important for a business owner in a family business setting?

Developing wealth independent from the business is paramount to an effective business transition. Financial independence affords the owners freedom to transfer some managerial and leadership responsibilities to successors without fear of them burning the entire house down. In essence, you have the opportunity to see your successors in action and determine if and to what extent additional coaching and mentoring may need to take place.

Let’s look at two examples that 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 profits 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 was ready to let his son, Jimmy, take over the reins. But, John’s business represented 90% of his net worth and he had not included 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. 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 John made every effort to transition the management of the business to Jimmy, he was always second-guessing Jimmy’s business decisions. Naturally this frustrated Jimmy and began to create family issues. Needless to say, Mom was not happy when business issues started to impact family time together.  Bottom line, because John was financially dependent on the business, he was not able to operationally withdraw, which impacted business and family harmony. 

Scenario #2 

After diligently working to build a successful business, Sam, age 60,  was ready to retire. Sam enjoyed spending time with his grandchildren, lived in an upscale community, owned a home at the beach, and was an avid boater. Unlike John in the first scenario, Sam had intentionally created a healthy balance between reinvesting in his business and building investments outside of his business. As a result, when it came time to step away from leadership, Sam had very little trouble because he had built a comfortable nest providing the income he needed to sustain his lifestyle. Furthermore, Sam had gradually increased his son’s role in the business which made Sam’s transition out of operations much easier.   As a result, Sam and his wife had the financial freedom to do the things they always wanted to do: spoil their grandchildren and enjoy time on their boat at the beach.

Consider the following for accumulating wealth independent from the business:

  1. Define what financial security means to you. 
  2. Develop a specific game plan to achieve your financial security goals and build liquid net worth independent from your business. 
  3. Develop a relationship with a trusted investment advisor.
  4. Activate your plan.

Making sound financial decisions today (and adhering to your plan) increases the likelihood you will have financial freedom in the future.


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