Don said:
But I
would guess that rich people whose eggs are all in the one basket of a
family owned company usually make out OK. Some do drive the company
into the ground and end up bankrupt for sure, but many just end up with
a lot less wealth, but still enough to keep the mansion in shape and
the cars and horses and the beach house in good condition.
The original premise is that our rich friends owned a house and a lot of stock
in grandpa's company and nothing else. If the company goes bankrupt, the stock
is worthless, but you still have the operating costs on the house (call it 5% a
year) and no income to support it.
If the house is worth $10 million, they can sell it as quickly as possible
(there is usually a long time on market at that end of things). They can still
have a pretty nice life style, but the mansion is gone.
People in the original situation often are reluctant to sell the stock, that's
why they are not diversified. So when they want to buy something that cannot be
financed out of current dividends (like little Buffy's wedding), they borrow. So
our friends may well have quite a lot of debt. If they have borrowed against
the stock, they could end up with a negative net worth. This is what happened
to some acquaintances I mentioned earlier.
While they are not likely to end up eating dog food, they might. They
certainly lose the mansion.
-- Doug