Broadly speaking, business owners prioritize, well, the business. That means focusing on current clients, developing new business and keeping employees on top of their respective games. Bottom line: business owners face myriad challenges, but at some point, preferably sooner rather than later, businesses get around to the business of protecting their enterprise.
At some point, business owners need to ensure that their businesses, livelihoods and personal stakes are protected. We can help you identify challenges and obstacles while potentially enhancing the monetization aspect of your business so your overall happiness and personal wealth improve.
Let's explore some of the strategies we can help you with that can bolster your business and your personal financial pictures.
Keep More Of What Your Earn
Obviously, business owners are in business to make money. However, there are an array of tax implications that come with owning a business that, when left unattended or approached the wrong way, can become burdens on the owner's overall financial outlook. Taxes and related fare can be daunting for business owners to deal with, but we strategize with business owners to simplify tax implications, turning what is often seen as a disadvantage into an advantage.
“Business owners often get bogged down on tax issues and lose sight of their main objectives, sometimes to the detriment of their businesses,” according to tax attorney Jennifer Correa Riera. “For instance, business owners may relocate to tax incentive jurisdictions only to later discover administration and compliance costs, as well as audit risks, that wipe out the tax savings. Likewise, businesses may engage in transactions that lack economic substance, but that result in a beneficial tax treatment.”
When it comes to retaining more of what you earn, taxes are one part of the equation. We help business owners identify other variables, including appropriately valuing yourself as the founder/owner, identifying reasonable compensation, how to regularly pay yourself and more.
“You should only pay yourself out of your profits – not your revenue,” according to Xero. “When you see money coming into your business, don’t assume you can pay yourself a big slice of that. Before you take your cut, you also need to take account of things like taxes, payroll, fixed costs and overheads.”
Conversely, some business owners may be too tight in terms of compensating themselves, opting to pour profits that could be used for adequate self compensation back into the business or into other employees. Those are noble endeavors, but you need to be compensated, too. We help business owners find the appropriate level of compensation, commensurate to where the business stands and where it is expected to be in the future. An easy starting point is for the owner to be part of the company payroll.
“Build that into your business plan right from the start, perhaps with a rising salary as your business grows,” according to Xero. That way you'll get used to the amount of money you receive and won't have to worry about taking out occasional large lump sums.”
Wells Fargo Advisors does not provide legal or tax advice.
Establish Backup Liquidity Plans
One way of looking at liquidity is having cash on hand in the event of an emergency of an unexpected slowdown in business. Unfortunately, many business owners do not address the issue of emergency liquidity until they actually need it and their backs are against the proverbial wall.
In many circumstances, it can be difficult for business owner to access capital on short notice. Lenders typically work on their own timetables, not the business owners, and as the lender's feet drag, the business could be compelled to take less prudent action to raise much needed capital. That can include asset sales, downsizing or reining in expansion. Each of those scenarios can lead to missed opportunity.
Remember the old saying “an ounce of prevention is worth a pound of cure?” It is relevant when talking about the need for business owners to have backup liquidity plans in place before that liquidity is actually needed. Among the ideas for backup liquidity that we discuss with business owners are how to keep enough cash on hand, asset-backed loans, lines of credit, SBA loans and more.
“If your business has steady costs across the year, multiply the monthly average cost you calculated in the previous section by the number of months you want in your reserve (e.g., three or six),” according to Factor This!. “For example, if your average costs are $20,000 per month and you want to keep a six-month reserve, multiply $20,000 x 6 months and your cash reserve would equal $120,000.”
Employees Matter
By their nature, many business owners are hands on. Some business even opt to run one-man shops for as long as possible or keep bare bones staffs. That may be the way to go when the business is in its infancy, but the goal is to grow the business and that usually requires taking on additional staff. Key employees are the heartbeat of thriving businesses and we help business owner identify ways to properly compensate valuable staffers while keeping them engaged and motivated.
Of course, there are risks associated with building a staff. We work with businesses to minimize the stress and financial burdens associated with expanding headcount.
Another risk can be turned into a positive, that being how to engage and retain the cream of the crop. As your business grows, competitors will likely take note and they will not be afraid to poach top talent when given the opportunity. Those employees will feel compelled to leave your firm if they feel they are not adequately compensated or recognized.
We work with business owners to find the right mix of cash and equity compensation and other incentives to not only lure, but retain high-level talent.
It's Not All About You
It may seem counter-intuitive, but business owners need to realize that everything is not always about them. Yes, you built the business, but part of growing the venture is finding capable people to reduce some of the day-to-day burdens associated with being a founder or owner.
Entrepreneurs create business because they love to create and even with all the ups and downs associated with running a business, most owners love what they do. However, that does not mean owners need to be bogged down in all of the day-to-day minutiae of the enterprise. And there are risks to that come along with the “all about you” management style.
Business owners that are too hands risk losing high-level talent because those employees will feel adequately challenged or stimulated. On a related note, businesses owners that insist on having their fingerprints on every element of the business create problems when it comes to succession planning. Owners that are not giving heirs or staff enough responsibility prior to retirement risk having to delay retirement because those employees are not yet up to the task of running business or worse, seeing the business decline upon leaving.
Owners that eventually want to sell their businesses face a similar scenario. As odd it may seem, the value of the business increases as the owner devalues herself. Potential buyers want to know the business is sustainable and will thrive without the original owner.
When it comes to the importance of building your business to position it for a possible sale under which your role will be reduced or you leave the company altogether, think of the real world example of Warren Buffett's Berkshire Hathaway. Buffett knows analysts and investors view Berkshire as his company, but at 88 years old, his time at the helm of the conglomerate is limited. Knowing this and the potential risk his death poses to Berkshire shareholders, Buffett said several years ago he was in the process of succession planning. While his eventual successor has not been officially identified, Berkshire investors at least know who the three leading candidates are and that goes along way toward easing concerns that a business can thrive without its original owner.
The Right Ways To Diversification
Many business owners have half or more of their net worth tied up in the business. Even if the business is thriving, that does not make for a diverse financial plan. As the business grows and becomes more profitable, business owners can start by increasing their compensation. From there, they can work with financial planners to diversify their personal financial interests away from the business while maintaining control over the business itself.
We work with business owners to identify the appropriate legal structures for their companies to minimize personal financial exposure should litigation against the firm arise. Additionally, we work with founders and owners to identify the four primary tax scenarios they need to be aware now and going forward: business taxes, capital gains, estate taxes and business losses and/or depreciation now and in the future.
Another important element of the diversification equation is helping business owners build properly diversified investment portfolios, something many founds and owners too frequently ignore.
“Investors who have obtained their wealth through the ownership or growth of a closely held business, however, all too frequently ignore this rule,” according to Seattle Business. “This group can be uniquely at risk as they go about their wealth planning, as they are often too heavily invested in a single asset – their own business. Entrepreneurs devote years to building a profitable enterprise and, for many, these businesses represent the vast majority of their personal net worth. This means not only a high degree of portfolio illiquidity, but also inflexibility. With portfolio performance almost entirely predicated on that of the business, concentration risk becomes a tangible concern.”
Protect The Right People
Reiterating important points highlighted throughout this piece, it is essential that business owners value top-level employees and have succession plans in place. Succession planning is an analytical and logistical process that, among other things, provide for the owner's family and employees in the event of death. Proper succession planning ensures there is enough capital on hand to keep the business running if the owner unexpectedly passes away, establishing and protecting the value of the business so that owner's heirs are taken care, establishing plans to retain key personnel so the business moves forward and more.
Without a clear succession plan come plenty of risks. Those risks include not knowing who will assume the helm when the owner passes, not having access to funding if needed, scaring away potential buyers of the business, losing key staffers and seeing the value of the business deteriorate simply because the founder is gone.
Among the advantages of a well-defined succession plan are protecting your heirs and ensuring the necessary resources are in place to help the business move forward. We help business owners prepare for the unexpected by establishing clear buy/sell directives so that the value of the business is preserved and heirs are protected. We also strategize with founders on how the business can retain key personnel and incentivize those workers to stay if the owner passes away.
“Proper succession planning calls for careful consideration and preparation.” according to Inc. “While it may be difficult to entertain the thought of exiting the business, unexpected circumstances can force proprietors to veer off script and seek new ownership immediately. Whether someone is nearing retirement age or just setting up shop, small business owners should take time now to build a succession plan that protects their business' longevity and secures their financial future.”
Put A Number On It
Every business thinks they know what their business is worth or, at the very least, wants to know what the business is worth, but many avoid actually obtaining a professional valuation. However, without knowing what businesses are worth, owners are potentially devaluing themselves and setting themselves up for some disappointment if they are considering a sale.
Due to emotional attachment, many business owners overvalue the business, but getting that initial, independent valuation helps owners identify strengths and weaknesses, establish as baseline for what to expect in a possible sale, and aid in the construction of proper compensation plans for employees.
Of course, there are multiple factors that go into valuing a business and several methodologies for doing so. There are asset-based valuations, capitalization of earnings, discounted cash flow valuations, and market-based valuations.
Many business owners also overlook intangibles, such as a highly skilled staff, proprietary technology, patents and trademarks. Each of those factors into establishing a business' value and can work in favor of owners when looking for outside investment or a buyer.
A proper valuation plan sets a floor for the value of business and can help drive that value higher. Remember, any investor or buyer will be doing due diligence on your business. You should be doing the same and doing it before anyone else does.
Summary
Business owners face plenty of challenges, but with the right team in place, those challenges can be met head-on. This paper arms business owners with strategies for earnings retention, tax planing, employee compensation, and succession planning.
Business owners can use this paper as a starting for evaluating some or all of the topic highlighted here in conducting their own due diligence on their businesses. Have you had an independent valuation performed on your business? What does your succession plan look like? Is it up-to-date and reflective of the current market environment? Are you attracting and nurturing top-flight talent?
For more information on implementing these strategies and helping your business realize its full potential, please contact Brian Konish or Chad Besegai at:
brian.konish@wfadvisors.com
chad.besegai@wfadvisors.com
At some point, business owners need to ensure that their businesses, livelihoods and personal stakes are protected. We can help you identify challenges and obstacles while potentially enhancing the monetization aspect of your business so your overall happiness and personal wealth improve.
Let's explore some of the strategies we can help you with that can bolster your business and your personal financial pictures.
Keep More Of What Your Earn
Obviously, business owners are in business to make money. However, there are an array of tax implications that come with owning a business that, when left unattended or approached the wrong way, can become burdens on the owner's overall financial outlook. Taxes and related fare can be daunting for business owners to deal with, but we strategize with business owners to simplify tax implications, turning what is often seen as a disadvantage into an advantage.
“Business owners often get bogged down on tax issues and lose sight of their main objectives, sometimes to the detriment of their businesses,” according to tax attorney Jennifer Correa Riera. “For instance, business owners may relocate to tax incentive jurisdictions only to later discover administration and compliance costs, as well as audit risks, that wipe out the tax savings. Likewise, businesses may engage in transactions that lack economic substance, but that result in a beneficial tax treatment.”
When it comes to retaining more of what you earn, taxes are one part of the equation. We help business owners identify other variables, including appropriately valuing yourself as the founder/owner, identifying reasonable compensation, how to regularly pay yourself and more.
“You should only pay yourself out of your profits – not your revenue,” according to Xero. “When you see money coming into your business, don’t assume you can pay yourself a big slice of that. Before you take your cut, you also need to take account of things like taxes, payroll, fixed costs and overheads.”
Conversely, some business owners may be too tight in terms of compensating themselves, opting to pour profits that could be used for adequate self compensation back into the business or into other employees. Those are noble endeavors, but you need to be compensated, too. We help business owners find the appropriate level of compensation, commensurate to where the business stands and where it is expected to be in the future. An easy starting point is for the owner to be part of the company payroll.
“Build that into your business plan right from the start, perhaps with a rising salary as your business grows,” according to Xero. That way you'll get used to the amount of money you receive and won't have to worry about taking out occasional large lump sums.”
Wells Fargo Advisors does not provide legal or tax advice.
Establish Backup Liquidity Plans
One way of looking at liquidity is having cash on hand in the event of an emergency of an unexpected slowdown in business. Unfortunately, many business owners do not address the issue of emergency liquidity until they actually need it and their backs are against the proverbial wall.
In many circumstances, it can be difficult for business owner to access capital on short notice. Lenders typically work on their own timetables, not the business owners, and as the lender's feet drag, the business could be compelled to take less prudent action to raise much needed capital. That can include asset sales, downsizing or reining in expansion. Each of those scenarios can lead to missed opportunity.
Remember the old saying “an ounce of prevention is worth a pound of cure?” It is relevant when talking about the need for business owners to have backup liquidity plans in place before that liquidity is actually needed. Among the ideas for backup liquidity that we discuss with business owners are how to keep enough cash on hand, asset-backed loans, lines of credit, SBA loans and more.
“If your business has steady costs across the year, multiply the monthly average cost you calculated in the previous section by the number of months you want in your reserve (e.g., three or six),” according to Factor This!. “For example, if your average costs are $20,000 per month and you want to keep a six-month reserve, multiply $20,000 x 6 months and your cash reserve would equal $120,000.”
Employees Matter
By their nature, many business owners are hands on. Some business even opt to run one-man shops for as long as possible or keep bare bones staffs. That may be the way to go when the business is in its infancy, but the goal is to grow the business and that usually requires taking on additional staff. Key employees are the heartbeat of thriving businesses and we help business owner identify ways to properly compensate valuable staffers while keeping them engaged and motivated.
Of course, there are risks associated with building a staff. We work with businesses to minimize the stress and financial burdens associated with expanding headcount.
Another risk can be turned into a positive, that being how to engage and retain the cream of the crop. As your business grows, competitors will likely take note and they will not be afraid to poach top talent when given the opportunity. Those employees will feel compelled to leave your firm if they feel they are not adequately compensated or recognized.
We work with business owners to find the right mix of cash and equity compensation and other incentives to not only lure, but retain high-level talent.
It's Not All About You
It may seem counter-intuitive, but business owners need to realize that everything is not always about them. Yes, you built the business, but part of growing the venture is finding capable people to reduce some of the day-to-day burdens associated with being a founder or owner.
Entrepreneurs create business because they love to create and even with all the ups and downs associated with running a business, most owners love what they do. However, that does not mean owners need to be bogged down in all of the day-to-day minutiae of the enterprise. And there are risks to that come along with the “all about you” management style.
Business owners that are too hands risk losing high-level talent because those employees will feel adequately challenged or stimulated. On a related note, businesses owners that insist on having their fingerprints on every element of the business create problems when it comes to succession planning. Owners that are not giving heirs or staff enough responsibility prior to retirement risk having to delay retirement because those employees are not yet up to the task of running business or worse, seeing the business decline upon leaving.
Owners that eventually want to sell their businesses face a similar scenario. As odd it may seem, the value of the business increases as the owner devalues herself. Potential buyers want to know the business is sustainable and will thrive without the original owner.
When it comes to the importance of building your business to position it for a possible sale under which your role will be reduced or you leave the company altogether, think of the real world example of Warren Buffett's Berkshire Hathaway. Buffett knows analysts and investors view Berkshire as his company, but at 88 years old, his time at the helm of the conglomerate is limited. Knowing this and the potential risk his death poses to Berkshire shareholders, Buffett said several years ago he was in the process of succession planning. While his eventual successor has not been officially identified, Berkshire investors at least know who the three leading candidates are and that goes along way toward easing concerns that a business can thrive without its original owner.
The Right Ways To Diversification
Many business owners have half or more of their net worth tied up in the business. Even if the business is thriving, that does not make for a diverse financial plan. As the business grows and becomes more profitable, business owners can start by increasing their compensation. From there, they can work with financial planners to diversify their personal financial interests away from the business while maintaining control over the business itself.
We work with business owners to identify the appropriate legal structures for their companies to minimize personal financial exposure should litigation against the firm arise. Additionally, we work with founders and owners to identify the four primary tax scenarios they need to be aware now and going forward: business taxes, capital gains, estate taxes and business losses and/or depreciation now and in the future.
Another important element of the diversification equation is helping business owners build properly diversified investment portfolios, something many founds and owners too frequently ignore.
“Investors who have obtained their wealth through the ownership or growth of a closely held business, however, all too frequently ignore this rule,” according to Seattle Business. “This group can be uniquely at risk as they go about their wealth planning, as they are often too heavily invested in a single asset – their own business. Entrepreneurs devote years to building a profitable enterprise and, for many, these businesses represent the vast majority of their personal net worth. This means not only a high degree of portfolio illiquidity, but also inflexibility. With portfolio performance almost entirely predicated on that of the business, concentration risk becomes a tangible concern.”
Protect The Right People
Reiterating important points highlighted throughout this piece, it is essential that business owners value top-level employees and have succession plans in place. Succession planning is an analytical and logistical process that, among other things, provide for the owner's family and employees in the event of death. Proper succession planning ensures there is enough capital on hand to keep the business running if the owner unexpectedly passes away, establishing and protecting the value of the business so that owner's heirs are taken care, establishing plans to retain key personnel so the business moves forward and more.
Without a clear succession plan come plenty of risks. Those risks include not knowing who will assume the helm when the owner passes, not having access to funding if needed, scaring away potential buyers of the business, losing key staffers and seeing the value of the business deteriorate simply because the founder is gone.
Among the advantages of a well-defined succession plan are protecting your heirs and ensuring the necessary resources are in place to help the business move forward. We help business owners prepare for the unexpected by establishing clear buy/sell directives so that the value of the business is preserved and heirs are protected. We also strategize with founders on how the business can retain key personnel and incentivize those workers to stay if the owner passes away.
“Proper succession planning calls for careful consideration and preparation.” according to Inc. “While it may be difficult to entertain the thought of exiting the business, unexpected circumstances can force proprietors to veer off script and seek new ownership immediately. Whether someone is nearing retirement age or just setting up shop, small business owners should take time now to build a succession plan that protects their business' longevity and secures their financial future.”
Put A Number On It
Every business thinks they know what their business is worth or, at the very least, wants to know what the business is worth, but many avoid actually obtaining a professional valuation. However, without knowing what businesses are worth, owners are potentially devaluing themselves and setting themselves up for some disappointment if they are considering a sale.
Due to emotional attachment, many business owners overvalue the business, but getting that initial, independent valuation helps owners identify strengths and weaknesses, establish as baseline for what to expect in a possible sale, and aid in the construction of proper compensation plans for employees.
Of course, there are multiple factors that go into valuing a business and several methodologies for doing so. There are asset-based valuations, capitalization of earnings, discounted cash flow valuations, and market-based valuations.
Many business owners also overlook intangibles, such as a highly skilled staff, proprietary technology, patents and trademarks. Each of those factors into establishing a business' value and can work in favor of owners when looking for outside investment or a buyer.
A proper valuation plan sets a floor for the value of business and can help drive that value higher. Remember, any investor or buyer will be doing due diligence on your business. You should be doing the same and doing it before anyone else does.
Summary
Business owners face plenty of challenges, but with the right team in place, those challenges can be met head-on. This paper arms business owners with strategies for earnings retention, tax planing, employee compensation, and succession planning.
Business owners can use this paper as a starting for evaluating some or all of the topic highlighted here in conducting their own due diligence on their businesses. Have you had an independent valuation performed on your business? What does your succession plan look like? Is it up-to-date and reflective of the current market environment? Are you attracting and nurturing top-flight talent?
For more information on implementing these strategies and helping your business realize its full potential, please contact Brian Konish or Chad Besegai at:
brian.konish@wfadvisors.com
chad.besegai@wfadvisors.com