As a business owner, my guess is you’re quite busy. Hopefully your company is growing and your days are consumed with marketing your business, caring for your customers and running day-to-day operations. I get that you have a million things to do. But I also know that financial planning for entrepreneurs comes with both a unique set of opportunities and threats when it comes to your business and personal finances.
So here are five financial mistakes business owners typically make, and how you can avoid them.
Mistake 1: Failing to Take Advantage of Great Retirement Options
If your business is ramping up and revenues and profits are rolling in the door, federal and state governments are waiting to grab their share in taxes. Fortunately for you as a business owner, you have some excellent options to shield more of those profits from taxes beyond what you can do with a traditional or Roth IRA. (For more, see: 3 Reasons Why Pre-Retirees Make Good Entrepreneurs.)
Great retirement plans for business owners include:
- A SIMPLE IRA: Allows you to contribute up to $12,500 annually in pre-tax dollars or $14,500 if you’re over 50.
- A Solo 401(k): Your first $17,500 in earnings can be contributed tax-free and you’re able to contribute up to $53,000 each year into the plan.
- A SEP IRA: While you can’t make pre-tax salary deferral contributions with these plans, you can steer up to $53,000 of your profits as a business owner into a SEP.
Mistake 2: Assuming You Need to Give Away Control to Get Financing
Everybody loves the show Shark Tank. Entrepreneurs pitch their ideas to a seasoned group of millionaire and billionaire tycoons (the “sharks”). If one or more of the sharks loves your business, they make you an offer with the expectation that they now own a piece of your firm in exchange for parting with some of their hard-earned cash.
Shark Tank is a great show for you to watch as a business owner. You’ll notice that the sharks don’t always need to take a controlling interest (at least 51% equity) in a company to be interested in what they do. In fact as of 2013, a full 39% of private equity deals are now minority interest deals. (For more, see: 5 Strategies to Avoid Outliving Your Money.)
In the past, it has definitely been the case that private equity firms and similar investors had no interest in buying in to just minority ownership. However, since the recession there have been fewer businesses for sale and more players in the space who may be willing to invest in a great idea with a non-controlling stake. (Translation – they may be willing to give you much needed capital and business expertise without you needing to give away the majority of the equity in your business).
Instead many private equity firms look for three things to be willing to take a non-controlling stake:
- Strong, recurring revenue streams.
- Established profits.
- A capable management team.
If your business fits the bill and you’re in need of cash and specific business expertise, consider starting a dialogue with several private equity firms to try to strike a deal without giving away control of your firm.
Mistake 3: Failing to Recognize When Bankruptcy is Your Best Choice
The saying, “the captain goes down with the ship” does not apply to you as a business owner, particularly if it means risking your personal finances.
Bankruptcy laws have been put in place for several reasons. A big one is to ensure that just because your business fails, it does not mean that your personal finances need to be ruined too. Specifically, individual retirement funds such as IRAs, annuity holdings and 401(k)s are often protected from seizure during bankruptcy proceedings in whole or at least in part.
So if you sense your “business ship” is sinking, avoid the temptation to delay the inevitable by looting your retirement fund to try save your business. As hard as it is to admit defeat, it’s better to leave your personal finances in tact so that you can try again with your next great business idea.
Mistake 4: Putting All Your Eggs in One (Familiar) Basket
Here’s another saying – “Invest in what you know.” The truth in this statement is that you should never invest in something you do not understand. For example, many investors get lured into investing in high fee, low return annuities without really understanding how poor many of these products are as long-term investment options.
However, in the case of the business owner, the logic of only investing in what you know well can be carried too far.
Take the case of the owner of a construction company who takes money out of his business to speculate in distressed housing or other forms of real estate. Loading all of his investment eggs into the real estate basket can go south in a hurry during an inevitable slump in the housing market. (For more, see: How Your Investing Misbehavior Can Cost You.)
Instead, consider a well-diversified portfolio of stocks, bonds and hard assets like real estate and commodities for your extra cash. Spreading your bets across multiple market sectors and asset classes allows you to ride out downturns in specific areas.
Mistake 5: Failing to Preserve What You’ve Worked So Hard to Build
No one likes to face the fact that some day they will either want or need to retire from the active management of their business. Warren Buffet is still cranking away at age 85 but if you’re a Buffet follower, you also know he’s laying the groundwork for succession in his business.
In the largest generational transfer of wealth in the history of mankind, Boomers are estimated to start handing over $10 trillion in assets to their heirs. And the vast majority of this cash is held as stock in privately owned companies. If you think you’re within 5-10 years of handing the reins over to someone else, start the process of putting business succession plans in place that cover not only tax considerations but also overall estate planning considerations as well.
As business owners, you’re always on the lookout to make the most of opportunities and protect yourself against any threats. Review this list of five common mistakes. Choose one or two that you can address in the coming months and make a plan to do so. You’ll be glad you did what you could to make the most of the hard work you put into your business. (For more, see: 5 Financial Strategies to Last a Lifetime.)