The Freedom Score: Unlocking Financial Independence for Business Owners

Achieve True Freedom by Understanding Your Financial Milestones

 

If you’re a business owner, the pursuit of freedom likely inspired you to forge your own path. Instead of opting for a traditional corporate job with a steady salary and benefits, you chose to build something uniquely yours. However, owning a business doesn’t always equate to the freedom you envisioned. The day-to-day responsibilities of managing clients, employees, and operations can be overwhelming, often tethering you more than liberating you.

For many entrepreneurs, true independence comes from reaching a point where work becomes a choice rather than a necessity. This is where the concept of the Freedom Score comes into play. Your Freedom Score represents the financial target you need to achieve—whether through the sale of your business or other means—to live life entirely on your terms. It’s not just about retirement; it’s about gaining the flexibility to decide how, when, and even if you want to work.

What Is the Freedom Score?

The Freedom Score is more than just a number; it’s a comprehensive evaluation of your financial readiness to fund the next phase of your life based on your personal goals and values. It prompts you to consider critical questions:

• Could your personal finances withstand unexpected events affecting your business?
• Would you still be able to live your desired lifestyle if your business ceased operations tomorrow?

Understanding your Freedom Score provides clarity and peace of mind, allowing you to plan proactively rather than reactively.

How to Calculate Your Freedom Score

Calculating your Freedom Score involves assessing four key components:

1. Desired Lifestyle

Begin by clearly defining your ideal future. How do you plan to spend your time? Consider travel aspirations, hobbies you wish to pursue, volunteer work in your community, and the people you want to surround yourself with. The more detailed your vision, the more accurate your financial target will be.

2. Annual Income and Expenses

After defining your ideal future, the next step is to determine the annual income required to sustain that lifestyle. This involves calculating all living expenses, including housing, food, utilities, and transportation. Don’t forget to factor in healthcare costs, taxes, and the funds needed for leisure activities and hobbies that bring you joy. Remember to account for the cost of living in the areas where you plan to spend most of your time, as this can significantly impact your overall expenses.

It’s also crucial to include in your budget any expenses that your business has traditionally covered. These might include costs for your car, home office, health insurance, travel, and other perks you’ve enjoyed as a business owner. Once you transition away from your business, these expenses will become personal responsibilities. By accounting for them now, you ensure a more accurate and comprehensive financial plan that truly reflects the cost of your desired lifestyle.

3. Investment Returns

Evaluate your current investments and project their future performance. Include retirement accounts, stock portfolios, real estate investments, and other assets. Don’t forget to consider future investments, such as proceeds from the eventual sale of your business or ongoing savings.

4. Business Value

Finally, obtain an accurate, up-to-date valuation of your business. Your company likely represents a significant portion of your net worth and will heavily influence your Freedom Score. Underestimating its value might lead you to work longer than necessary, while overestimating could result in financial shortfalls after exiting.

Reaching the Freedom Point

Your Freedom Score helps identify your Freedom Point—the moment when selling your business would provide sufficient funds to support your desired lifestyle indefinitely. Reaching this milestone signifies that you’ve achieved financial independence, but it also brings critical decisions about your future with your business.

Consider the stories of Tim and Helen, two business owners who approached their Freedom Points differently.

Tim’s Journey

At age 40, Tim started his company in Minneapolis with minimal assets. By 55, his business had flourished, growing to a valuation of $15 million and comprising 80% of his net worth. Although he had diversified his retirement accounts, Tim remained heavily invested in his business without realizing he had surpassed his Freedom Point. Without an exit strategy, Tim continued to expose himself to unnecessary risks by keeping the majority of his wealth tied up in his company. This oversight left him vulnerable to market downturns and unforeseen personal events that could jeopardize his financial future. Additionally, Tim failed to account for the costs associated with selling his business—including taxes, broker fees, and bonuses—which would reduce his net proceeds to $10 million.

Helen’s Path

In contrast, Helen began collaborating with a financial planner at age 40 to understand her pre-retirement and retirement cash flow needs. Together, they calculated her Freedom Point and conducted annual assessments of her business’s value, implementing internal strategies to accelerate its growth. They also accounted for the expenses associated with selling her business—such as taxes, legal fees, and transaction costs—to determine the net proceeds she would receive from a sale. This thorough planning ensured that her target number accurately reflected the amount needed to fund her desired lifestyle. Fifteen years later, Helen reached her Freedom Point. Thanks to proactive exit planning, her business was well-prepared for a potential sale when she hit her target. When the time came, Helen evaluated various sale options and chose the one that best aligned with her goals. Throughout this journey, she had ultimate clarity about her objectives, which reduced stress and prevented burnout.

The Lesson Learned

Achieving your Freedom Score is a significant milestone that opens doors to new possibilities. It’s about more than financial security; it’s about reclaiming your time and focusing on what matters most to you in life. By understanding your options and planning thoughtfully—like Helen—you can reduce risks, diversify your wealth, and enjoy the rewards of your hard work on your own terms. Don’t let a lack of planning turn your success into vulnerability, as it did for Tim.

The Risks of Holding On Too Long

Surpassing your Freedom Point without adjusting your financial strategy can jeopardize the freedom you’ve worked so hard to attain. Continuing to hold onto your business increases exposure to various risks, including:

• Market Downturns: Economic shifts could reduce the value of your business.
• Operational Risks: Internal issues like declining sales or increased competition could arise.
• The Four Ds:
  • Divorce: Personal relationship changes can complicate business ownership, especially if shared with a spouse.
  • Departure: The exit of a key partner or employee can destabilize the company.
  • Disability: Health issues may prevent you from effectively running your business.
  • Death: Without a proper succession plan, your beneficiaries might struggle to manage or sell the business, diminishing its value.

Options After Reaching the Freedom Point

If you’ve reached your Freedom Point but aren’t ready to retire, you have several strategies to diversify your assets while maintaining involvement in your business:

1. Sell a Minority Stake

Through a minority recapitalization, you can sell less than 50% of your company to a financial investor, such as a private equity group. This option allows you to liquidate a portion of your investment, reducing personal financial risk while retaining control over business operations.

2. Sell a Majority Stake

In a majority recapitalization, you sell more than 50% of your business. The buyer typically expects you to continue managing the company for a predetermined period. This option provides substantial liquidity, enables you to benefit from potential future growth through retained minority ownership, and allows you to focus on areas of the business you are most passionate about.

3. Enter into an Earn-Out Agreement

An earn-out involves selling your business but staying on to run it as a division of the acquiring company for a specified time, usually ranging from one to seven years. This arrangement often includes performance-based incentives, aligning your interests with the new owners and providing a structured transition period.

Ready to Calculate Your Freedom Score and Act?

Achieving your Freedom Score is not just a milestone—it’s the gateway to a future where you control your destiny. It’s about more than financial security; it’s about reclaiming your time and focusing on what truly matters to you in life.

As financial planners specializing in assisting business owners like you, we’re here to guide you through this pivotal journey. Our process begins with our Empower Conversations exercise, designed to help you and your spouse clarify your ideal future, financial goals, and core values. This deep exploration ensures that your financial plan is tailored to what you genuinely aspire to achieve.

Here’s how we can help you take the next steps:

1. Clarify Your Vision

Through personalized discussions, we’ll help you define your desired lifestyle both before and after the sale of your business. This includes mapping out your aspirations, whether they involve traveling, pursuing new ventures, or dedicating time to community initiatives.

2. Map Out Income and Expenses

We’ll work together to project your annual income and expenses needed to sustain your envisioned lifestyle. By accounting for the specific cost of living in your chosen location, we ensure your financial targets are realistic and attainable.

3. Optimize Your Investment Strategy

Our team will assist in designing a risk-adjusted investment portfolio that complements your goals while minimizing unnecessary risks. This approach helps balance the wealth concentrated in your business with diversified assets, providing greater financial stability.

4. Evaluate and Enhance Your Business Value

We offer support in annually assessing your business’s valuation and identifying opportunities for value acceleration. This ongoing evaluation aligns your business growth with your personal financial plan, ensuring you’re on track to reach your Freedom Point.

5. Develop an Actionable Plan

By integrating all these elements, we’ll chart a clear path toward achieving your Freedom Score. You’ll have actionable steps and strategic guidance to make informed decisions that align with your financial objectives and personal values.

Take the First Step Toward True Financial Freedom

Don’t leave your future to chance. Join the many business owners we’ve already assisted in achieving financial independence and peace of mind. Schedule an initial consultation with us today:

• Call Freedom Financial Partners at (651) 797-3532
• Book an Appointment Online

Embark on your journey toward true freedom, knowing you have a dedicated team supporting you every step of the way.