Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
I really enjoy working with small business owners - individuals who seemingly face incredible odds and yet still find a way to succeed. Helping such individuals is probably one of the most rewarding aspects of my role as a financial advisor.
Small business owners often have a hard time distinguishing between themselves and their business. After all, they have poured their time and sweat into making the business successful and such devotion can often come at a cost to themselves and their families. I have new client that fits this profile.
I was referred to the business owner because he has “30 employees and needs a 401k plan.” This is indeed true as the company is 10 years old, running successfully, has a relatively loyal workforce and has reached the point where a company sponsored retirement plan makes sense. However, there is so much more to the story.
While getting to know this particular business owner as we discussed options for a company retirement plan, it turns out that he has diligently been reinvesting S-Corp profits into the business. He has organically grown the business and as a consequence is currently debt free. And although this sounds great, it has come at a huge cost.
He has no savings to speak of. He has no retirement funds. He does have a wife and two children under 6, but no life insurance. And amazingly, or maybe not, he has no estate planning documents and no idea what would happen if he passed away other than that his wife, who is not active in the business, would get 100% of a business she does not know how to run.
He has been running his business with a singular focus and has not stepped back to realize that his business and his personal life are two very different things and have different needs. When we had our first planning meeting with his wife present, I can assure you that she recognizes the difference!
So, what’s next? In this case we are examining the corporate returns, balance sheet, and cash flow statement to rework how the business is capitalized and to allow him to begin taking some money out so that he and his family stop living like paupers. We are running life insurance illustrations to protect his family should something happen to him. And we are examining buy/sell options should something happen as well. In short, a top to bottom review.
If you are business owner who has not taken the time to consider both your business and your personal life holistically, know that you are not alone. But also know, that help is available! For a comprehensive plan, give me a call at your convenience!
Pete Welsh a/k/a 401Guy
I started working with a new client last week. The initial conversations were around their desire to establish a retirement plan for their small but growing company. The company was started in 2014 by the 2 founders and is in construction. They have now matured to the point where expanding their benefits offering makes sense and they want to reward the employees who were with them in the beginning and attract new talent. All of this is pretty straight forward, and we will be starting up a new plan for them in the next few weeks.
The interesting part of the conversation occurred after we discussed the establishment of the retirement plan. I asked the two owners about the company and what planning they had done. In particular, I asked about their growth plans, as well as their exit plans, including if one should die unexpectedly. They did not have good answers, but their answers were not that unusual for successful entrepreneurs. They have been working hard at growing the business, making sure that it’s moving forward, but not stepping back to consider longer term opportunities and risks.
One item on which we spent considerable time involved what would happen to the business if one of them were to die unexpectedly? They did admit that they had brought this up to one another in the past, but never moved forward to take action or to visit with anyone about it. When I asked them to “give me a rough number” on what they thought the business was worth today, they both said “$1million” at the same time. This means that if one of the partners were to die that the other would need $500,000 to buy out that interest. That’s $500,000 in cash, today. How much more might be needed in 3, 5, or 10 more years? And neither has the $500,000 needed now.
Additionally, we talked about how the founders have been reinvesting most of their earnings into the business to help it grow. This is great in many respects, but by doing so they have not been doing any planning for themselves. The business is everything, but we all know it might not always be. So the conversation quickly moved to how we can begin to de-risk their personal situations by initiating some financial planning for themselves.
In total, it was a good conversation with numerous next steps. They were concerned where to begin on a couple of action items and I told them that I could work directly with their CPA and Attorney to get the ball moving on the buy/sell agreement. I’m putting together some quotes for consideration and gave them a list of items I need to begin working on their personal situations. By breaking everything down into steps and charting a path forward, both partners felt empowered about taking control.
In many respects, that is how I see my job – empowering you as the business owner to take the steps you know need to be done but are unsure where to start. Give me a call at your convenience and we can begin taking those next steps together.
Pete Welsh a/k/a 401kGuy