What a Healthy Balance Sheet Looks Like for a Millionaire

Speaker 1 – 00:00
If your business is worth 10 million, if you haven’t divested one bad year, you could lose it all like that. I can’t tell
you how many. 10 million, 20 million, 100 million. Balance sheets are just complete chaos.
Speaker 2 – 00:10
Just because you got a good result doesn’t mean it was the right decision.
Speaker 1 – 00:12
Your superpower is your business. How do we protect that at all cost?
Speaker 2 – 00:17
If you need money, can you access, are you prepared to sell a property to get the cash you need? We’re going to
talk about some ratios to think about to make sure that your balance sheet is healthy in the event that you need
liquidity.
Speaker 1 – 00:28
The most impressive net worth to me is that’s the hardest thing to achieve, regardless of how big your balance
sheet is.5 million, 10 million, 20 million. How do you know if you have a healthy balance sheet that is here to stay?
Let’s talk through. What are some good ratios? What are some good health metrics of a balance sheet? You see so
many examples where someone is over levered in one asset class that goes down and they’re, you know, they have
this high lifestyle because they’re counting or you know, the business owner who has huge equity value, huge cash
flow, doesn’t set the chips aside.
Speaker 1 – 01:04
And then suddenly there’s one downturn where tariffs change or, you know, something changes and what could be
totally fine at 24 months they have to shut down because they didn’t do the right planning and events and all their
equity was in, all their net worth was in that business or that single holding. So, you know, tell us from it, just from
experience, like, why is this so important?
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Speaker 2 – 01:24
Yeah, I think just to take a step back, not all 10 million figures are the same. We’ll sit down with someone who has
a $10 million net worth, 60% of it is in his or her business. And then you sit down with someone else who has a
$10 million net worth and it’s split between investments and business interest and real estate. And the problem
with having such a big net worth with positions so locked up is liquidity. It’s if you need money, can you access it?
Well, a lot of people that have large positions in business interest, it’s not so easy to just sell your business and get
the cash you need if you need it. There’s a lot of factors and considerations that go into diversifying your position
from a business interest.
Speaker 2 – 02:02
Whether it’s there’s kids, it’s kids involved, whether you’re selling it to a third party, blah, blah. Same thing with real
estate. If you Have a big net worth. And a lot of it’s in real estate. Like are you prepared to sell a property to get the
cash you need to deal with what you need to deal with, you know, making sure you have those levers you can pull
when you need them is really important. And too often we find people that have net worths in that range don’t have
that liquidity readily available. So I think we’re going to talk about some ratios to think about to make sure that your
balance sheet is healthy in the event that you need liquidity. Do you have access to funds when you actually need
them?
Speaker 1 – 02:37
So if you look at the highest net worth people and not saying that’s the goal, just a lot of financial advice is, you
know, diversification, asset allocation. And you can get to a financial security number by doing that. I just want to
be clear. Big wealth is you know, super concentrated, let’s say bets, businesses or you know, or could be a bet one
stock that went up. So a lot of times you want to create a huge net worth. Usually it is a real estate empire, a big
business interest. You have a concentrated stock in a startup that hit big to keep wealth. That’s where a lot of the
tools of these tools come into play. Asset allocation, diversification, having cash reserves. So there’s two
segments.
Speaker 1 – 03:22
But if the goal is not to, you know, get to this super net worth, you can do both. You know, you’re going to need
different tools on the accumulation stage and you’re going to need different tools on the distribution stage. And
you have to have a financial plan that calibrates as you go. We love the analogy, Mount Everest when you’re
climbing, we, you get down. Most accidents happen on the way down, on the way up. So you need to have the tools
ready to go for both of those journeys up and down. But some of the ratios we like to look like and this really
depends. So if you are a business owner, you, if you have a successful business, usually the best returns you can
get are going to be by reinvesting in your business.
Speaker 1 – 04:00
And so if your business is worth 10 million, now it’s worth 20 million, now it’s worth 30 million. If you haven’t
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divested, you’re still 100% owner, a majority owner. One bad year, you may have gotten great returns. You don’t
have cash on the sidelines. And a bank’s like your industry is too risky. You could lose it all like that. It’s not
important to set money Aside because of let’s get better returns. Okay. This is your superpower, is your business.
How do we protect that at all cost? So the bigger that equity position gets, the more personal liquidity you need to
become the bank.
Speaker 2 – 04:32
And let me just stop you right there because do you think that’s hard for a lot of business owners because they’re
so passionate about their business and they want to reinvest it? Do you, do a lot of business owners feel like, man,
if I take some of these profits away from my business, people might think I’m losing faith or I’m not as committed
to this. Do you, do you get that sense from a lot of business owners?
Speaker 1 – 04:53
I think it’s, I think it’s three things. I think it’s one, it’s a, just, it’s a, they’re very confident in their business.
Overconfident, which the most successful entrepreneurs are. But you know, getting from zero to one and then
after, that’s two totally different skills. Right. You know, part of it is that overconfidence of like, this is where I’m
gonna get the best. I think the second thing is, it’s a lack of knowledge or discipline because they haven’t been
through, they’ve been through a downturn when their business is worth a million bucks and they have to take a
hundred grand of their personal money and see it through. When you’re a 30 million and you have 50 employees
and suddenly your payroll is a million per run, it’s a different, that’s a different.
Speaker 2 – 05:27
You’re not putting a bandit on that with your personal savings.
Speaker 1 – 05:29
Yeah. And you’re a three month stall. What are you gonna do? Throw in, you know, a million per pay or $6 million if
you want to have the responsibility of having, you know, an explosive business that continues to grow in these big
valuations like you need to have.
Speaker 2 – 05:43
And that pretty much circles back to why we’re doing this podcast. Because a lot of business owners that have all
of that equity in their business don’t have that liquidity to just throw in and fix a downturn or fix problem.
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Speaker 1 – 05:52
And I think the third thing is there’s probably that I’ve noticed in some meetings there’s some guilt or shame. Like I
feel like I have all these amazing poise. I don’t want them to think. Like, I think one of the best things you can do
honestly as a business owner is stealth wealth. Like you go buy a vacation house, everyone’s going to see that. But
if you know, stuff a couple million dollars in the brokerage account and have a secure line of credit or a Treasury
account to back up this big asset that you’re building, no one’s going to see that. It’s no one’s business. But you’re
going to make sure ebbs and flows, tariffs, market downturns, employee retention, whatever issues come up, you
lose a big client. You’re going to make sure that asset continues to grow because that is your superpower.
Speaker 1 – 06:26
But without that backup, you’re going to be in big trouble potentially. You know, that’s why we recommend even if
you’re making a couple million dollars a year, 500,000 reverse budgeting. We did a prior episode on this is so
crucial and having the why behind it. If you try to, if we try to say, hey, you need to spay this much for retirement,
they’re going to look at you crazy like, my business is retirement. Look how, look how good it’s doing. You need this
because we want to make sure your business is rock solid no matter what. Not suddenly got your attention, but the
discipline to actually set that up. It’s very tough to do. And a lot of people are like, why do I have this cash that’s
doing nothing? My business has grown at a 20% CAGR.
Speaker 1 – 07:04
I have this cash that’s earning 3 or 4%. It drives them crazy. Well, run out at 20% CAGR for the next 20 years and
see how big it is. That 3%, who cares? That is guaranteeing, not guaranteeing. It’s supporting that explosive
growth. So there has to be a balancing act there. So generally speaking, you know, we recommend concentration
risk. You know, you don’t want to have more than like 40% of your money tied up in one stock or one business. But
most business solo preneurs or that turn into like these 10, 20, it’s like 90% of their net worth is tied up into this. So
the discipline to start saving is so crucial and to keep the lifestyle not as if you’re worth 10 or 20 million, but as if
you’re worth, you know, here’s your liquid net worth, here’s your income.
Speaker 1 – 07:44
Let’s be careful, but let’s also not have regrets and like hide under our cash on the pillowcase and be too scared.
It’s a really, it’s a balancing act.
Speaker 2 – 07:52
But you mentioned not having 40% of more than 40% of business interest on your balance sheet. And you also
mentioned not having 40% in a single stock. I think I just wanted to highlight that for a second because I think that
can be really tough for a lot of people. If you have invested in a stock and you have a emotional attachment to a
position and it has gone sky high and now it’s 40%.
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Speaker 1 – 08:14
May continue to.
Speaker 2 – 08:15
It may continue to. It’s 40% of your balance sheet, and you have all these great memories with it because it’s gotten
you to this point, but that doesn’t mean it’s going to get you through the next 10 years, the next 20 years. And I
think that can be really scary for a lot of people is when they get an emotional attachment not only just to
business, but like to a stock position.
Speaker 1 – 08:32
Yeah.
Speaker 2 – 08:32
I always think, like, you got a good result from it, but was it a good decision? Like, just because you got a good
result doesn’t mean it was the right decision. And so you always have to be calibrating, hey, is it worth it to keep
this position as it is now? It’s 40% of my net worth. If I take a 20% hit on this, where do I stand?
Speaker 1 – 08:50
Yep.
Speaker 2 – 08:51
Versus taking some of those profits off the table. That can be really hard for a lot of people because they see the
math behind it. But actually, the emotional side of it can. Can almost outweigh it for a lot of people.
Speaker 1 – 08:59
It’s a really hard, I think, in three categories. One, if you’ve inherited money and like, let’s say your. Your parents said
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the stock, like it’s at and T’s paid this dividend, we believe, and it’s like you feel like that’s sentimental value, but
now that’s like 80% of your net worth. You just inherited a million bucks in your 30s, and it’s like, what do you do?
The second category would be the business. It’s really. It’s almost impossible, I’m going to say, to get to lower than
40%. Because if you’re, if you’ve created a business, a tech company, whatever it is, and it’s worth 10 million and
you’re like 35 or 40, there’s no way you have, like, you didn’t have time to build anything else. Right. Maybe you have
a million dollars, if you’re lucky, of like, liquid net worth.
Speaker 1 – 09:37
So are we going to suddenly get to 40%? No. Are you going to sell your business to create that liquidity?
Speaker 2 – 09:42
No.
Speaker 1 – 09:42
Because you see the pathway. Maybe you get that valuation of 30 million and change your life, change your kids
life and create generational wealth at this point. Keep it real. But Be smart. We got to start sucking out profits and
setting up these accounts and not just rely on the end game. So it is truly a balancing act. But you got to keep
those numbers in mind and you have to calibrate and long term. That’s why you see, executives is another
example. You know, they’re paid, a lot of them are paid like a third base, a third bonus, a third RSUs. And suddenly
they have the rules around these stock units and they, the confidence in the company if they’re, you know, keeping
these stock units, if they’re C suite executive. And so suddenly, you know, you have.
Speaker 2 – 10:20
Almost feel like an emotional attack. Man, if I sell, what is that telling everyone else? Like, if I’m selling my.
Speaker 1 – 10:25
Yeah, and it’s hard for this all the time. It suits the exact. If you’re probably in your late 40s, early 50s and like, or
beyond that, and you’re like, maybe you have a $5 million net worth and like you got a million in real estate, a
million, your 401k, and you’ve got 3 million in stock. So 60% of your money is in the company that’s also paying
you. So if something happens, you paying your.
Speaker 2 – 10:41
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Mortgage, you know, like all these, it.
Speaker 1 – 10:43
All, everything’s riding on this one thing. And it’s a bad look. So you know, you have to have a strategy, start
diversifying out of that. You could see your net worth get cut in half if your, that one stock does a bad year. So
you’ve given your whole life to the company. They could have a change of ownership or something. They could
forget about you the next day. So why don’t you know, take care of your personal balance sheet and your net worth.
But it’s, it’s a tough thing to do, especially when you’re still there. Okay, so, you know, let’s talk about other ratios. So
liquidity ratio. If you hold a business, if you’re in the accumulation stage, I mean, honestly, we want to see, we want
to see 5 to 10% of like safe money.
Speaker 1 – 11:16
If you, if you’re the sole owner of like a, of a $10 million. We want to see half a million to a million dollars of cash at
all times. And this isn’t just cash. This would be like a laddered treasuries or CDs, but stuff that you can get
immediately if you need to. We want to see a healthy brokerage account that you could take a line of credit
against. You know, once you’ve reached that Cash position.
Speaker 2 – 11:33
And you, this is the second time you’ve referenced a line of credit that just keeps the funds invested. So I just want
to make sure that people are aware. If you draw on a line of credit on your investment account, your funds stay
invested. You’re just using that as collateral.
Speaker 1 – 11:45
You’re able to draw on it, you.
Speaker 2 – 11:46
Can put it back in and pay it back. So funds stay invested at all times and you avoid capital gains tax when.
Speaker 1 – 11:51
You sell off of it. Now some other things we want to see is like obviously we want your primary residence to be
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under 20% of your net worth. So if you’re worth 10 million, we want to see your primary residence only represents 2
million of that. So we want to see your personal residence less than 20%. We want to see your total real estate
under that 40% number as well. So if you’re like worth 8 million, you’ve got 6 million tied up in all this investment
real estate, you have a lot of limited options. You know, you’re going to, you’re not going to enjoy that until you sell
it. And at that point it’s all, you know, and it’s like, well, do you ever sell it? We sell all the time. So the most
impressive net worth to me is liquid net worth.
Speaker 1 – 12:22
It’s the hardest thing to achieve. It takes so much discipline. It takes so much discipline to keep it there and
because it’s so easy to spend. But cash is always king. And I would say liquid investments are the same thing if
you have a longer term frame, time frame in mind because you know, you don’t need to sell if you also have that
first war chest of the cash reserves. And by the way, we’re talking about 5 or 10% at these net worths of 5 to 10
million. Not if you’re like a young doctor with a million dollars in net worth. We’re probably recommending you
50,000 in cash and we absolutely like demolish your money into the market and like get that to 1, 2, 3, 4, you know,
eventually up to 10.
Speaker 1 – 12:56
But while you’re really depends on the stage of your this between that 5 to 10 million is when we want to have that
support system to keep it growing. So debt we want to keep to, you know, less than 15% for like a 5 to 10 million
family. So, you know, we wouldn’t want to see more than a, you know, let’s say a million and a half of debt.
Speaker 2 – 13:13
You say this is mainly just, I mean, business debt is one thing.
Speaker 1 – 13:16
Real estate Debt.
Speaker 2 – 13:18
But like this is just, hey, mortgage is too big.
Speaker 1 – 13:20
That’s right. You bought to be a house. That’s right. You. Yeah. So other, I mean we could go through a couple case
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studies, but any other thoughts so far?
Speaker 2 – 13:27
Ben, back to the real estate portion of it for a second. I mean, you mentioned you won’t be able to enjoy it until you
sell it.
Speaker 1 – 13:34
Right.
Speaker 2 – 13:34
Until you see like the cash proceeds actually come in. Talk more about the liquidity piece. Cause I, I’ve seen a lot of
clients that have big real estate positions that you know, are worth what they’re worth on paper, but they don’t have
access to really any of the money that they need for more shorter midterm stuff.
Speaker 1 – 13:50
Yeah, that’s a. Go back to where liquid is invest. So when you look at, I love the quote, what you owns you. I think
that’s so true. And so when you have a business, when you have real estate, it requires work, it requires money to
keep it going, it requires sweat equity. So when you have these, you know, fractional shares and like this friends,
real estate, this, it’s not easily liquid. In fact, a lot what we’ve seen more common is that those people ask you for
more money and justify behind, oh, it’s growing, we’re going to purchase more. It’s the next thing you know, it’s not
just investment, it’s requiring more investments and more stress. And so that’s one of these ratios in mind because
a lot of times when you do these investments, they require your time, attention and your resources.
Speaker 1 – 14:31
So you need to have the liquid money to continue to fund them so they’re successful. And there’s different
examples of that. It’s not all investments you do are going to require capital ongoing, but a lot of them outside the
traditional sense do. And so that’s why they’re really inappropriate for, you know, really higher net worth. People
that can do that without disrupting the rest of the financial plan if things go wrong.
Speaker 2 – 14:51
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Sure.
Speaker 1 – 14:51
So, okay, well we’d encourage you know, make sure you have some of these ratios in mind. Resist some of the
temptation. A lot of this is relational. So like it’s, this is your friend, this is your family working with a financial
planner. Sometimes you could just give you the accountability of like, hey, sorry, I can’t do this because XYZ or you
don’t even owe an explanation. But having that no, that’s automatic. Or having the yes when it’s automatic because
you have a plan, you have rules supporting that plan. The guardrails so important I can’t tell you how many. Ten
million, twenty million, a hundred million? Balance sheets we look at are just complete chaos. And there’s people a
lot of times that feel very poor because it’s not liquid money.
Speaker 1 – 15:33
It’s spread all over the place and requires calls and updates and, you know, future money going in. It can become a
lot of stress pretty quickly. So please reach out if you have any questions. We’re happy to audit your balance sheet
and create a game plan over time of how to create, you know, maybe what’s a high net worth but chaotic into a
balance sheet that’s simple, that actually works for you. You don’t work for it. So thanks for listening. We’ll catch
you next week.