David H. Kinder, RFC®, ChFC, CLU
The #1 Planning Problem for Business Owners... The Word 'Or'.
Updated: Jan 20
The financial services industry is funny at times. Sometimes the industry's agenda is directly contrary to the best interests of those whom they claim to serve in their best interests. However, it's not their fault. They just don't know any better.
The investment management guys want business owners to invest in OTHER people's businesses! How? By investing in stocks and bonds through IRS regulated retirement plans.
What are stocks and bonds? They represent a percentage of ownership or debt to other businesses! And they call it "diversification" away from the "one-stock millionaire". (The business owner is the one-stock millionaire.) Here's the difference: When you invest in other people's businesses... it's often a "buy and hold" strategy. Or perhaps more aptly defined as "Buy, hold, and pray". There is no control there. All you do is invest and go along for the ride.
And why through IRS regulated retirement plans? Well, as business owners, we are CONDITIONED by our accountants and tax preparers that we are "at war" with the IRS every year, and our goal is to lower our tax bill each year! That's how accountants and tax preparers view their value to you every year. And... if it's good enough for you... they want you to get your employees enrolled in these plans too. Hence the popularity of 401(k), SIMPLE-IRA, and other regulated plans that don't allow you to access capital if and when you need it.
But the small business owner... can make their dollars return back to their businesses many times over! They have control! They bring expertise! They know their business! Why would they invest in some other business? In this instance, "diversification" can be "di-worse-ification".
But the life insurance focused guys... are a little different, but not by much. The life insurance agent comes by and says "Who is going to take over when you're not here? Shouldn't you put a plan in place to protect the value of your business for your surviving spouse? I want you to spend more money and increase your overhead to protect the value of your business and equalize your net worth among your children so you show that you love them equally."
Obviously, that's a business succession planning conversation being funded by life insurance. There are other planning ideas that can be done... such as "key man" coverage - if much of your business success relies on the talents of others, or "executive compensation plans" - to attract and reward such key employees. The problem is... while this kind of planning is great... it's primarily for more established businesses, and especially larger businesses with higher revenues - such as $5 million+ in today's dollars.
The vast majority of business owners in America (and I've heard it be as high as 86% of all businesses)... are "Mom and Pop" businesses. They are smaller businesses that generally employ under 20 people and have revenues under $2 million (and often much less). Think of the corner liquor store, produce stands, fast-food stores and franchises (perhaps 1-5 locations), dry-cleaners, auto mechanics and repair, and many other hard working American small business owners.
Small Business Owners are the BACKBONE of America and the American Dream!
Their #1 problem: "Do I save more money for retirement? Or do I invest back in my business?" If they skillfully put the money back in their business... they can get a better return on that money. The reason they can get a better return is because it's not JUST money, but the SKILL behind the money. However, they're also putting "all their eggs in one basket" (their business) and that means that they are depending on the sale of (or succession of) the business to fund their retirement.
But will someone even WANT to take over the business when that time comes? Things are changing RAPIDLY! Is your business keeping up or not? Or is the regulatory environment favorable for your business... or not? (I know that as minimum wage laws keep increasing in California, it has a negative impact on many laboring businesses, such as fast food, grocery stores, and similar kinds of labor.) But if your business doesn't (or can't) keep up, doesn't that devalue the business when it comes time to sell? Wouldn't that mean having a "just-in-case" retirement because you won't get the sale price OR the ongoing income from the sale of the business that you had hoped for? Certainly not the retirement one would really dream of having though.
What's the solution? The solution is to rephrase the two questions above and change ONE word - from 'or' to 'and'. "Do I save more money for retirement? AND do I invest back in my business?" If you know how, you can do BOTH!
If we can take greater control of our cash flow and shuffle some things around a bit differently (legally, of course), we can keep more of the money on the things we are spending money on. Think of this: Imagine you have a business that has an annual overhead of $500,000. In 10 years, you will have spent $5,000,000 (or $5 MILLION DOLLARS) in your business overhead.
Let me ask you this: If you could have earned and kept 5% on all of that you spent in your business... and kept that money for your retirement... what would that be worth?
$5 million x 5% = $250,000.
Would an extra $250,000 over 10 years of spending help you have a better retirement? By NOT collecting on that... it's a "Lost Opportunity Cost". Correction: It's a HUGE opportunity cost! If you could EARN that on your business SPENDING... without giving up the tax breaks afforded to businesses for deducting all of your business expenses... wouldn't that help you fund your retirement?
Let's suppose that I can't get ALL of that for you. In fact, it CAN'T be done. The math won't work out for all your expenses. But it CAN work for large purchases and expenses. What if I could only get you an extra $50,000 to $100,000 of that for your retirement that you otherwise wouldn't have? Wouldn't that still be worth sitting down and talking about?
I believe that the only reason business owners (of any size) are not doing it... is simply because they don't know about it.
But as Bryan Bloom said in his book series "Confessions of a CPA" said: "Those who get it, are doing it."
If we can Capitalize a Business Funding Account of some kind for a few years... and begin to use THAT to finance our business purchases and spending... we can turn things around for every small business owner in America! This 'account' can be used for far greater flexibility than any other kind of bank financing for any other purchase - whether it's staff salaries, fleet vehicles, rent, workman's compensation insurance... whatever it is. If we could recapture that money and "revitalize" it for the business... that business would have two great assets: the Business Funding Account and the value of that business!