The 5 Pillars of Wealth – Part 2!
In my last article, I wrote about your family home and your superannuation balance as two of the five pillars of wealth. This time around, we’ll look at the three final pillars: the value of your business, property investments—and something totally left field.
The Value in Your Business
First up, realising the full value of your business isn’t easy. Plenty of people reach retirement age without considering how they might sell their business. Others wait until an unfortunate medical diagnosis turns their lives upside down. As a result, you see businesses sold for knock-down prices. Worse, some people just turn the key in the lock and walk away after thirty years of blood, sweat and tears. In my mind, that’s tragic. Here are some secrets I’ve learned to make your business attractive to potential purchasers.
- Make sure it runs like a Swiss watch. These days, not many people wear Swiss watches. They’re passé. Not many businesses are well run, either. That also seems to be out of fashion. But an efficient business is highly saleable. I’ve written before on this topic—check out this previous post.
- Make yourself redundant. Your business will sell for a higher price if it comes without you attached. Savvy purchasers won’t bet on a business which needs the founder’s magic to make it successful. They don’t want to be beholden to you.
- Allow three years minimum to bring your business up to scratch before the sale. Banking three years of rising profits will entice purchasers through the door.
- Choose a broker who knows your business like the back of his or her hand. When acting for clients who are selling their business I prepare an impeccable prospectus, offering full transparency. And I’m on hand to provide prompt answers to any questions the purchaser may raise. Real estate agents can’t offer this level of service. They lack an intimate knowledge of your business; they also lack accounting smarts.
Not Just Any Investment Property
So now your family home is rising in value, you have a decent wad of super, and you plan on realising the maximum price when you sell your business. There’s still another step to consider: buying an investment property. Here are three key reasons for taking the plunge:
- It provides a guaranteed income stream.
- You spread your risk across multiple sectors.
- You can sell the property if your superannuation runs low.
If my clients ask me about property investments, I steer them clear of residential property. I’ve seen people build much greater wealth by investing in commercial property. Here’s why:
- Commercial property is a more lucrative investment than residential property. You receive higher rental returns against the value of your asset.
- Commercial leases usually have annual rent increases baked in, as well as renewal options at the end of the term. So you have an income stream you can count on.
- Your lessee is responsible for outgoings—council rates, utilities, and maintenance costs. That means more money in your account.
- Commercial property may offer subdivision potential. This is more obvious with brownfield sites where the land is underutilised, or where the existing structures are dilapidated. Be careful, though. If the area has been zoned for heavy industry the soil may be contaminated with toxic chemicals, requiring remediation.
- And yes, you can negatively gear the purchase of commercial property.
Of course, some commercial properties are dud investments, while others are deadset money-makers. Remember how I dissect the accounts of my clients’ businesses? I can do the same with a potential investment property. I’ll run the numbers, and see if it’s going to pay off for you.
That’s fine, Evan, you might say, but how am I going to fund this purchase? Easy. Leverage the value in your family home and the value in your business. Get the ratios right, and the banks will be lining up to lend you what you need. Once again, keeping an accurate and tidy set of books will bring your bank manager to the table, toot sweet.
One Final Tip
Before we go, here’s a little secret I tell my clients: I can keep their money safe and protect their assets under almost any circumstance—but I can’t protect them from the Family Court. If they end up divorced, they’re going to lose a substantial chunk of money. Maybe 60% all up.
In life, the financial prizes go to those with the emotional intelligence, the trust and the sense of commitment needed to forge a loving and lasting marriage. It’s more than just the fifth pillar of wealth creation. It’s also the source of deep personal happiness.
As your financial concierge, I can help you build the first four pillars. As for the fifth, you and your partner need to build it yourselves!