When owning and running a business, efforts to future-proof your own financial wellbeing most often rates lowly on the priority list.
In my experience, business owners consistently do three things that don’t work in their favour and, in doing so, neglect their own personal finances and future financial wellbeing.
Seeking professional advice is an important investment in your future. It’s important to do your research and find a professional that has a proven track record and experience in working with small business owners.
- Fail to put money aside for the future (in assets that will grow and benefit themselves later in life).
The perfect example is superannuation. Business owners will often say that they don’t have superannuation, or they don’t have to contribute to super because they are self-employed. A common belief amongst business owners is that “the business” is their superannuation or retirement savings.
That strategy works well if your business is consistently growing in value or will likely have an attractive value in the future that somebody is prepared to pay for. After all, that’s the reason why you are building your business and not investing your cash, profits or dividends into other assets along the way, right?
The problem is that some businesses don’t grow in value. Many businesses will be sold for much less than the purchase price, some change hands for the equivalent of no more than 12 months of wages of the selling business owner. Others will be sold for just the value of the stock in the warehouse, workshop or shop floor.
Plenty sell for well under market price because the business owner simply had no idea what the business was worth. Many will exchange for fire sale prices as the business owner rushed the sale process because they didn’t manage the succession process properly. More on this shortly.
Lastly, many business owners will just wait until the lease expires, turn the lights off, close the door behind them and cease trading, realising no value whatsoever for all the hard slog of building their business.
- Not understanding the valuation of their business.
Business owners often have specialist knowledge or skills in a particular field or industry.
Understanding how to calculate value, how it is determined, how it can be improved and the factors that affect valuation are considerations that are not front of mind.
Importantly, not all businesses or business models have large, growing or even any value at all. The quicker business owners understand and realise this, they will understand they have the choice of improving or changing their business model. They may choose to simply squirrel away as much cash as they can from the business while they continue to trade and use that cash to invest in other assets or business’s that will grow and/or provide them with a future income stream to replace the business the day their business stops trading.
If many more business owners understood what the future may likely hold for them, they’ll make much better decisions today for their own financial wellbeing.
- Plan their own business succession poorly.
Business owners will often leave their exit plan to the last minute or eleventh hour, preferring not to think about the reality that they will eventually leave the business whether by choice, disability, death or another reason. The result inevitably is a negative impact on the valuation of the business.
It also stands to negatively affect employees, clients of the business and the owners’ family.
For any business owner, if you haven’t worked alongside specialists in succession planning, you are putting everything you have worked hard for in establishing the business at risk. A detailed succession plan can determine whether your business thrives and grows with minimal disruption or becomes overrun with disputes and confusion or a lack of vision as to how to move forward.
Without a solid succession plan developed in consultation with family, management, an estate planning lawyer, and other professionals, you are setting the business up for one, or all, of the following:
- The value of the business may be lessened when survivors choose to sell it.
- The entire business will be adversely affected by power struggles and chaos, and the culture will reel from negative emotional impact.
- Clients will lose faith in the ability of the business to continue to serve them at the level expected.
- Employees will seek other opportunities in lieu of perhaps clinging to a sinking ship.
- The business fails because the owner kept much of his knowledge to himself.
In my experience, this cautionary tale is relevant to nearly all business owners. They all present with the same symptoms, but all have a different haircut and business card. For the sake of a secure financial future it is vital business owners look after their most important resource: themselves.
Daniel Irving is a well-respected Financial Advisor who, with his business partner, launched the Bridges Lake Macquarie franchise in 2016, which has already seen tremendous success.
Daniel’s key point of difference is that he views his role as much more than just figures. His passion is providing advice that is realistic, sensible and ongoing in order to help his clients achieve the best financial outcomes. He believes it’s a journey, not a one-off exercise.
He specialises in working with busy professionals, SME business owners and medical professionals, and thrives on complex financial requirements.