Monitoring Financial Health: Business Term

by | | Other Cool Stuff, Retirement

Business Term

What is Business Term?

Business Term indicates the number of years you could live on your current business equity. Business equity includes business assets minus related debts.

Business Equity / Annual Living Expenses = Business Term

Example: If you have a business valued at $1,000,000 with a loan of $300,000, and you spend $100,000 annually, your Business Term is 7.0. $1M business value – $300K debt = $700K equity. $700K equity / $100K spending = 7.0.

Business Term (Bt) is one of four Elements that make up your Total Term.

Why is Business Term Important?

For many business owners, the business is the primary driver of financial success. This is for two reasons: the income while they own the business, and the proceeds when they sell it.

Because an owner controls her business directly, the business is her clear focus to invest time, energy, and resources. Improving the business means higher current income and higher value at sale.

Improving Your Business Term

Increasing the value of your business is one way to improve your Business Term. For a truly healthy Bt, you must also build wealth outside your business. Don’t rely too much on selling your business to fund your retirement.

Build Business Value

Many times, your highest return on investment (ROI) comes from your own business. Closely held businesses are less diversified and therefore riskier than other investments. But more risk means more potential reward too. And you help control the outcome.

Here are some ways to build the value of your business.

  • Improve profitability (revenue up and/or expenses down).
  • Implement systems to run more efficiently.
  • Remove the owner from day-to-day operations.
  • Create a reliable stream of new sales.

You can’t spend your business equity. To convert it to cash to fund your lifestyle, you generally need a liquidity event.

It’s never too early to start planning for an eventual sale. Many people wait too long, which narrows their options.

Build Wealth Outside Your Business

Business owners often have the majority of their net worth tied up in their business.

This may be a good problem to have, but it also creates a challenge. A business is illiquid, which means you can’t easily convert it to cash to fund your lifestyle.

If your Business Term makes up a big chunk of your net worth, increase your Savings Rate outside the business. Funnel cash flow into more diversified investments like stocks, bonds, and perhaps real estate.  Having a solid financial foundation outside the business relieves the pressure of selling the business to fund your retirement.

Do you know your Business Term? Do you have a strategy to convert your business to liquid assets to fund your retirement? That’s where we come in. Schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

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