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Business Owners - Building Your Personal Wealth
Company Directors
A director of a company has a responsibility to its shareholders to maximise the value of the shares. A business owner also has a responsibility to allow for owner drawings, to allow the business owner and their family to fund their personal lifestyle. The other responsibility for a business owner is to reduce business debt. But what do you do when there are profits left over after these priorities have been met?
A significant number of business owners automatically plough any surplus profits back into their business, but without increasing the company's profitability eg. upgrading sales vehicles, repainting the premises, extra staff, higher inventory levels.
Its important to diversify away from your business risk through investments which provide an independent income stream outside of your business.
If "all your eggs are in one basket" you may not get the selling price you expect which will impact on your retirement goals. Many business owners have an unrealistic expectation of the market value of their business. The majority of businesses have been developed into a successful operation due to the skills, attributes and personality of the owner. However, purchasers are interested in future profitability, not what has happened in the past. Therefore, a trade sale of the business without the existing owner will normally have a detrimental effect on future profits €“ and this will be factored into any offer price for the business.
Create Your Personal Diversified Wealth Plan
LYFORDS advisers are skilled at working with business owners to develop risk protection plans (business succession planning) and to build their independent wealth portfolio.
What level of Retirement Income do you want?
Start by creating a personal retirement budget - how much will need to fund the lifestyle you want in retirement.
Set annual dollar targets for your personal wealth goals, and review them regularly.
Review your business and personal structures eg. the benefits of using a family trust. The correct insurance covers in place.
Extracting money from your business
Establish goals for extracting money from your business for personal investment. Be realistic as to how much you can take out of the business, allow a buffer. This is especially true if you have rapid growth or a large lead time between buying raw material and collecting the money from the sale. Break these income targets into quarterly and monthly targets.
Conduct regular 'health checks' of your business's financial position with your accountant to see if there are any areas where better discipline could free up excess cash eg inventory, accounts receivables, fixed asset costs.
Make sure the investments you go into are flexible and not locked in. Beware the trap of cashing up your savings to put back into your business when there is a down turn. Its easy to do but may be stopping you restructuring and looking into why there is a decrease in profitability and how to overcome this.
Preparing your business for sale
Systematise every procedure your business does, refer to Michael Geuber, The E-Myth Revisited.
Put a plan in place to make sure your business is not solely reliant on you as the business owner, since this will have a negative impact on any sale. You may need to consider business succession planning, staff recruitment and training and product or business development.
Start preparing your business for sale well before you intend to sell - at least three years before. 'Grooming' of key performance indicators that are important to potential purchases will help you maximise the market value of your business. This is where a good accountant can add real value. For example 'Good Will' is not taxable, you get a tax free capital gain.
Brad Sugars, Action International - "A business is a profitable enterprise that works without you" If your business falls short of this, then you have a job and your business will be worth a lot less. A business with good systems and procedures will fetch a higher price.
Protecting Your Wealth
An accident or illness can set your wealth building plans back very quickly. Plan for the uncertain, refer to Business Succession Planning