The decision in brief
In this invented $20 million balance sheet, the business is 60% of stated wealth. A simultaneous 35% business valuation decline and 25% listed-equity decline reduce stated wealth by $5.45 million, or 27.25%, before taxes, debt or sale costs.
| Asset | Starting value | Assumed shock | Value change |
|---|---|---|---|
| Operating business | $12,000,000 | -35% | -$4,200,000 |
| Listed equities | $5,000,000 | -25% | -$1,250,000 |
| Cash | $3,000,000 | 0% | $0 |
| Total | $20,000,000 | -27.25% weighted | -$5,450,000 |
Define the economic balance sheet
Assume the family owns a business valued at $12 million, listed equities worth $5 million and $3 million of cash. The business represents 60% of the stated total. Those figures are hypothetical and the business value is an estimate, not immediately realisable cash. The exercise excludes debt, tax liabilities, property and other assets to keep the arithmetic visible.
The question is whether the liquid portfolio repeats risks already embedded in the business. Common customers, geography, financing conditions or sector demand can connect exposures that have different legal wrappers. The office should map those links before choosing a simple diversification label.
Apply a shared adverse scenario
The assumed business valuation decline is $12 million multiplied by 35%, or $4.2 million. The listed-equity decline is $5 million multiplied by 25%, or $1.25 million. Cash is unchanged in this single-period nominal scenario. The combined fall of $5.45 million is 27.25% of the starting $20 million.
This is a stipulated stress, not a historical estimate, probability or forecast. It neither establishes the correlation between the business and public shares nor values an option hedge. It asks whether the family could tolerate the specified outcome and continue funding its commitments.
Distinguish valuation risk from funding risk
The $3 million cash position covers six years of a hypothetical $500,000 flat annual spending need if it has no other purpose. That calculation changes if the business requires support, guarantees are called or tax payments arise. A reduction in estimated business value does not by itself create a cash payment, while a funding request can arrive without an immediately visible valuation change.
A real review should identify whether personal guarantees, shareholder loans or pledged assets connect the business to the investment account. It should not assume that unused borrowing capacity remains available in the same adverse market scenario.
Compare actions rather than slogans
The committee could investigate diversifying new liquid investments, retaining distributions as cash, reducing a concentrated listed position or changing borrowing arrangements. Each action has costs, constraints and consequences that require suitable professional input. This case does not recommend a transaction or assume that selling a private business is practical.
If a hedge is considered, document its target exposure, maturity, liquidity, cost and residual basis risk. A hedge on a public index may offset only part of a private business's economics. The name of the instrument is not evidence that it solves the balance-sheet problem.
Preserve a decision record
Keep the valuation date and method for the business beside the liquid-account values. Record which shocks were chosen, why they were useful and what the family could change if they occurred. Revisit the scenario after a distribution, acquisition, financing change or major sale.
The purpose is to improve the decision boundary: how much additional correlated risk can the liquid account take, and which obligations must remain separately funded? Precision in the final percentage cannot compensate for an incomplete balance sheet.
Decision points
- Map business and investment exposures together.
- Keep estimated wealth separate from spendable liquidity.
- Document residual risks and practical constraints for every proposed hedge.
Test a different assumption
The tools use explicit hypothetical inputs. Change the spending, liquidity or portfolio assumptions to examine the arithmetic behind your own illustration.
Sources and further reading
The linked sources provide conceptual background. The worked examples and planning assumptions on this page are this publication's own illustrations.