The Importance of Converting Equity to Capital

Guy Baker By
Guy Baker

MBA, MSFS

 

  1. Introduction
  2. The Beginning
  3. Why have a business entity
  4. To Pass Through or not
  5. Closed Entities and Pass through entities
  6. The benefits of owning a closed entity
  7. The Three Circles of Wealth – The Common Denominator
  8. The Three Big Questions
  9. I. Creating and Retaining Value
  10. II. Keeping Superkeepers
  11. III. Exit Strategies
  12. Additional strategies to build and retain wealth
  13. Conclusion

 

Getting the Most Out of Your Privately-Held Business

As any professional football fan knows, efficiency in the last twenty yards, (coined the Red Zone) determines the ultimate success of the team. Red Zone statistics measure the success of the team and the quarterback. Success here increases the chances of winning. Continued failure in the Red Zone marks lost opportunity and eventually causes poor performance and a low finish in the standings.

There is a Red Zone in the business world. It is the last few years before the ultimate score, the sale, or transition of the business to new management. And in the same way the quarterback knows the Red Zone is crunch time, the business owner soon realizes the few years before they sell the business is when they need to maximize profitability, develop a management team, and build financial independence. Maybe you started from scratch. Maybe you built a product, a production process and distribution system for one primary purpose – profit – the ultimate measure of business success. Profit eventually becomes income and is often converted to equity as the owner adds to retained earnings or the capital account.

Is profit the endgame? Probably not! It is only a measure of the final score – the time when you, the business owner, are finally ready to convert your equity into capital. This is where Red Zone planning pays off. Converting equity into capital lays the foundation for passive income and is usually the last step to financial independence.

Red Zone capital is usually the cornerstone to retirement for most business owners – income you and your family can live on during your non-income earning years. Effective Red Zone Planning must occur during the last few years (months?) prior to the sale – the years before you turn out the lights for the last time. You really only get one chance to truly score in the Red Zone and it takes a lot of planning and preparation to successfully pull it off. Will you be ready? To answer this question, perhaps we need to go back in time a bit and review how you got here.

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