Part 1 of 2-Part Series
This month’s ratio is again related to the business aspect of our clients. It is the second and final ratio that is specifically for our business owner clients and is aptly named, the business ratio! It seems a very generic name, but actually the business ratio (BN) is unique to the Kismet Wealth Group. It is not a ratio that is used across the industry because it was developed in house, especially for our distinctive class of clients and as such is proprietary to us.
The BN is very important is because the information it calculates shows how long a business owner, you in this case, can maintain their lifestyle using only their equity in the business. Additionally, the numbers the BN yields can be used to show how much of your wealth is tied up in the business, hence the name, the business ratio. The BN is calculated by the following formula:
This ratio is a bit more complicated than the previous ones we’ve explored, so we’ll need to unpack the individual parts of the formula to fully understand its meaning. First off to understand Total Practice Equity is, we’ll need to revisit the term equity which we defined in an earlier blog. Equity is the amount of money which would be returned to you as a business owner if the company was liquidated at that time. If it is a private company and you are the sole owner, it equates to the entire value of the business left after it was liquidated and the debts paid off. Equivalently, if you had a partner or partners, your equity would be whatever your percentage of the business is after it was liquidated and liabilities (money owing) repaid. And finally, if it was a public company, you would be a shareholder and the value of your shares would equate to your equity. The term Total Practice Equity sounds like it assumes you are the sole owner, however it works the same way whether or not you are, as the value being inputted is simply the value of your equity in the business.
Part 2 continued next week.