You spend thousands of hours every single year running your business to ensure that it is working the way you want it to work and that it’s creating the product to want it to create. Most business owners would agree that beyond that, the main priority is to grow their businesses as fast as they can. So the natural tendency is to pour every dime they make right back into it.
Though that’s not a bad idea, there are some alternative paths that make more sense. If you find yourself as one of the many doing this, take a look at what we have written below. For those of you that do have substantial assets outside of your business, you may want to skip down a few paragraphs.
Your business isn’t worth as much without you in it
Unless you are part of the minority, a large part of your business runs on your back. If you weren’t there to carry the load, there are few others at your company (if anyone) that would be able to carry it. That’s not to say you don’t have valuable employees; they just don’t “own” the business the way you do. You create most of the value that your business provides; and even more importantly—you maintain most of the relationships key to your business’s success. Many of those relationships see you as the business, instead of your business as the business.
Consequently, selling your business might not be as straightforward as you may think it is. While it’s true that businesses are bought and sold all the time, every buyer wants to ensure business continuity before they stroke such a big check. This might not be as big of a hurdle for some of you that attract business this way; for everyone else this is a problem.
The other issue is that because you’ve put in so much work over the years your perspective on how much your business is worth is almost certainly skewed. So if you do overcome the hurdles of selling a business (or handing it off to someone else) you may not have as big of a nest egg as you thought you would. Obviously the opposite is true too. Your business could be worth more than you think it is; but that’s much more rare.
The feast-or-famine problem
The construction industry, and many others, generally lives in a feast or famine environment. When times are good, you’re more busy than you want to be; and when times are bad, you're far less busy than desired. This can create a problem as business owners if most of your assets are in the business. If the business income streams slow down, not only do you have liquidity issues within the business, but you might also have liquidity problems in your personal lives. If you can no longer reach to the business for money when you need it, you start to sweat.
Ensuring that you have built up enough personal assets outside of your business is the best way to ensure that you don’t have problems if the economy slows or comes to a grinding halt. That way you can deal with challenges the business will face independently of your own.
Effective personal planning for business owners
Building assets outside of your business can make all the difference to your peace of mind. When properly done, you’ll see your two most important assets growing side by side—independent of one another. Your business will flourish as you do what you do best; and your personal assets will grow and become a beautiful income-producing asset as well. To ensure that this happens, you need to take a look at the following five areas of financial planning.
Investment planning
Investment planning is a critical area of personal financial planning that can make a big difference in how your investments grow over time. The truth is that all investments are not created equally. And optimizing your portfolio can mean missing out on hundreds of thousands—sometimes even millions of dollars —if you’re in the wrong ones. It could also mean taking on more risk than you thought you were if you find yourself in the wrong investments. Part of our process when evaluating the investments of business owners is looking at
Proper diversification
Minimal drag (created by fees)
Investment quality
Client risk tolerance
Transparency
All of these steps (and more) contribute to our process when looking at and advising where and how a client should invest.
One of our favorite things to do with a potential client is to run an audit on their current portfolio that will completely dissect the investments and expose what’s really happening within it. We often find portfolios that have
Hidden fees
Disguised low-quality investments
More risk than intended
High turnover within certain investments
Unintentional indexing of the market
And more!
All of these things either contribute to more risk or inferior returns to your portfolio.
We have sat in many meetings presenting the results of the audit to potential clients, and they are shocked when they see that their investments aren’t what they thought they were. In most cases these portfolios weren’t in dire situations, but they most certainly weren’t invested in the most optimal places. The best way for us to run these audits is to use the quarterly/annual statements that are provided by the financial institutions that hold the investments. We would love to run one for you!
Tax planning
Though we aren’t tax professionals—and therefore cannot give tax advice—tax planning is an important piece of what we do. Part of making sure your investments are growing as efficiently as possible, is to put them in tax-efficient investment vehicles. Some investments are designed in a way that reduces the amount of taxes you will have to pay throughout your life. Others can be extremely tax inefficient and can cost you more than you think over the years.
We can work with your CPA to ensure that you are in the most tax efficient vehicles possible, and that you’re using strategies like tax loss harvesting to reduce the taxes due on certain investments. A little bit of planning in this arena can be worth its weight in gold. If you’re looking to optimize your investments so that they are tax efficient, contact us through the “Contact” icon at the top of this page.
Retirement planning
You may be one that thinks you’ll just work until you die, but the problem with that is that most people can’t do that. There comes a point that you just can’t work anymore—especially if you suffer with any health problems that the majority of the older population faces. At some point you’re going to need to stop working. And that time might be sooner than you think.
For everyone that does want to retire someday, there are a lot of things to plan for. Many of us will be in retirement for 20 or more years. Which means we will need to build a large enough portfolio or assets to support whatever lifestyle we plan to have during our golden years. Some of the factors that must be considered in retirement planning are
Income needs
Investment selection
Income sources
Tax rates
Social security
Medicare
Specific medical concerns
Lifestyle
Legacy goals
Risks like inflation, sequence of returns and others
Obviously this isn’t a comprehensive list of things to consider when planning for retirement but it does point out many of the things that must be accounted for and thought through. If you want to answer some of these questions, we’d love to sit down with you and start planning.
Insurance planning
As we all know, insurance is a strategy that we use to manage the risks that we all face on a daily basis. Proper insurance planning includes assessing risks that you specifically face in your life—and in your line of work—and ensuring that you are properly protecting against those risks. Often that means transferring that risk to an insurance company; but it can also mean reducing, avoiding or retaining those risks as well. A few risks that are commonly associated with insurance planning are in the following categories:
Death
Disability
Liability
Health
Property
Casualty
Ensuring that our clients are not only aware of these risks, but that they also plan for them is our top priority. In conjunction with the other elements of planning it is imperative that clients are protected in as many areas as possible.
Estate planning
The last major, essential planning category is estate planning. Estate planning ensures that you have a specific plan for what you want to happen to your assets throughout your life, as well as after your death. This tends to be the last thing that people want to do in financial planning, but it is extremely important to power through, and get done.
One of the most important elements of estate planning is building a portfolio of assets that will be tax efficient not only throughout your life, but also to pass them to your heirs upon your death. Some investments are much more efficient than others and can reduce what you pay the government and increase what is left to your family.
We also work with estate planning attorneys to ensure that you have the proper documentation in place so that your assets are taken care of without incurring extra fees and taxes. Part of this is preparing wills and trusts that stipulate the actions that will be taken with your estate. If you don’t have these types of documents in place, we’d love to connect you with the attorneys we work with.
Contact us
If you are looking to start planning in one more more of these essential categories feel free to contact us here, or click “contact” in the upper right hand corner of this page.
