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Is Building Your Personal Balance Sheet Part of Your Business Strategy?

October 20, 2022 3 Min Read Business Strategy
Mario O. Vicari, CPA
Mario O. Vicari, CPA Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

One of the important issues we see with private company owners is that they have such an intense focus on building their companies, they don’t think about their own personal balance sheet. All too often, we have seen cases where an owner reaches retirement age and has not built a significant asset pool outside of their business. Usually most, if not all, of the owner’s net worth is illiquid and invested in the company’s stock and real estate. Without building up their balance sheet outside of the private company, some owners are forced to sell or take other actions due to their lack of liquidity.

This issue is commonly caused by a lack of planning or awareness. Many companies produce a profit and don’t have a specific plan or strategy about what to do with it. The profits are often reinvested in the business indiscriminately and end up in any number of areas on the balance such as inventories, receivables, or more equipment. Without an intentional plan to build your personal balance sheet as the owner, it is easy for excess profits to get absorbed by the company, especially if it is growing.

By building your personal balance sheet, we are not suggesting stripping the company of needed resources. We are simply recommending setting a goal for some portion or percentage of your profits to be paid to shareholders to provide a current return on your invested capital, which you deserve for taking the risk in owning your stock. When investing in a public company, you analyze the investment based on the change in stock price and the money earmarked to go back to shareholders. While public companies operate on a different scale, conceptually the same criteria should be used when assessing whether a private company shareholder is receiving an adequate return on their invested capital.

The key to building your personal balance sheet is to do it incrementally and consistently over time, so the distributions can be made in ways that don’t hurt your company or get in the way of your bank covenants and other financial obligations. Certainly, the key is to start as early as you can and let compounding work to your benefit. I suggest that at every year-end planning meeting, shareholder wealth distributions should be on the agenda even if you are not able to make a distribution each year.

Diversifying your personal balance sheet should be an important part of the wealth plan for every private company owner and a regular discussion with your advisors. The key to making it happen is to give it consistent attention over a long period of time and allow compounding to be your friend. Even though your company’s stock and/or real estate will still comprise the largest part of your net worth, diversifying into other more liquid assets will provide you some risk diversification and more options at retirement.

Mario Vicari, Kreischer MillerMario O. Vicari is a director and a specialist for the Center for Private Company Excellence. Contact him at Email.   



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Mario O. Vicari, CPA

Mario O. Vicari, CPA

Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Construction Specialist, Family-Owned Businesses Specialist, ESOPs Specialist, M&A/ Transaction Advisory Services Specialist, Transition/Exit Planning Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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