Elements of Wealth Management Episode 7: Business Planning

Welcome back, everyone, to the next episode of our series, We're Talking Money. We're walking through the wealth management elements, episode seven. Today we're going to be talking about a very important one that affects more people than you may think. It's the business planning element.

Many people have businesses. Maybe they don't have your typical brick and mortar business, but maybe it's some type of rental income or real estate that could be in an LLC. But maybe it's not an LLC, and maybe they're not taking advantage of things that they should be taking advantage of. Stay tuned, we'll be right back.

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Welcome back, everyone. We're Talking Money, and we're talking business planning today. So people don't always think about this, as he said, and some people don't think about what they're doing as being a business. But you consider things like someone who just simply takes on items and sells them on eBay, that's a business. And so some people say, well, I'm just doing that on the side. Well, yes, you may be doing it on the side, and maybe you're not paying any tax on those dollars, maybe you're getting away with that. On the other hand, you might be missing tremendous opportunities that you could take advantage of if you had it set up properly.

I think in today's episode we're going to illuminate some blind spots for business owners, what I'll say are bona fide business owners. And then for those of you who don't have a business, but maybe you have the makings of one or something that looks and feels like one but you haven't formalized it, then we'll talk about how you do that.

I think many people perhaps don't think about their business or don't want to register as a business, don't want to start the LLC, because they don't know of all the advantages. Business owners by far have the biggest advantage in terms of retirement planning, in terms of tax deductibility. A lot of people, they don't think about the ways they can set up a business, and so they might have a business, but a lot of times it's just a sole proprietorship. There are some tax advantages to doing that, but there is certainly not as many advantages as, say, someone who has it in a C corp or an S corp or an LLC.

Having it as a sole proprietorship, one of the biggest mistakes I see is just that they don't want to go through what they think is a painful registration and getting articles of organization and all of those things done. But when it's a sole proprietorship, well, guess what, you're going to be, from a tax standpoint, you're not going to be taxed favorably. And two, you're exposing everything. So if you own it and it's a sole proprietorship, guess what, you want everything else as an individual. And so if you get into a bad spot with your business, you could be exposing your other assets, things that you don't associate with your business, but they're personally owned.

Yeah, you make a good point there, Phil. There's different ways you can structure your business, and LLC, probably the most common that we see, is the easiest to set up. It's not as daunting as everyone thinks. Actually, really, it's pretty easy, right? You can jump online, do it. You can get your EIN number, your employer identification number, quick, literally in minutes. It's pretty simple, and it's worth it.

So the LLC will protect you from a liability standpoint. It may make sense to have multiple LLCs. You have maybe this house that's more of a short-term rental that's in one LLC, but then you have a long-term rental that might be in another LLC, just because if something happens in the short-term rental, you don't want that liability to flow over to the other home, which has nothing to do with the short-term rental.

Keeping them in one, to your point, all of those assets, if they're in one LLC, they're all assets of that LLC. Hopefully this would never happen to the business owner, but let's say that someone is seriously injured on one of their properties, and they're sued, and heaven forbid they don't have enough insurance, all of the assets in that LLC could be exposed. You need that separation depending on the kind of business. And even in a traditional brick and mortar business, Dustin, you'll have separation. So you'll have entities within an entity, so you'll have multiple layers, not to try to get away with anything, you're not trying to deceive anyone, but you certainly want to minimize the opportunity for something that might come your way, like a lawsuit.

Yeah, absolutely. Think of a manufacturing company. You have your one large business, but then you may have the shipping department, which is a completely separate business from the manufacturing department, from another department, because if a trucker gets in an accident or something happens and negligent or whatever, maybe you fall asleep on the wheel, you don't want that to negatively affect the other parts of the business.

You could even have the equipment. So the equipment that's doing the manufacturing, that might be in a separate LLC, lease to the company for use. So if somebody gets harmed in that equipment, you got a workers comp claim, you might have a lawsuit at the company level, but at least you can still work the next day because you still own all of your equipment. There's so many ways to put layers in between.

So let's say that you do own the business. Where do we start? And what we always talk about is starting with the why. We want to ask the important questions. We want to figure out what are the goals. We want to figure out really where the business is at today, what's the vision, what the goals are, where we see everything moving forward. And that allows us to really have clarity around, one, what we should be planning for, and two, what are the opportunities available. So let's just go through a few of these questions I was asking to you, and love to hear your thoughts on them.

Sure.

The right questions. What are the short, mid, long term goals of a company? What do you see there?

A written business plan would include things like what are your short term goals, what are you trying to accomplish in the first year, two, three, and the next five and the next ten. If you're not focused on ten years, you're absolutely not going to steer in the right direction today. If you have a business that can evolve and that has staying power, if you don't have short and mid-term and long-term goals, you probably won't see that company reach its fullest potential.

Second question: could the company survive without the owner or leader? This is where insurance can come into play, and making sure you have a valuation for the business if, God forbid, something happened, just from a buy-sell standpoint.

This is one that we talk about a lot, is do you have a buy-sell agreement? And a lot of, yeah, yes, I have a buy-sell agreement. Was it funded? Yeah, and that's what we see a lot, where, no, it hasn't been funded yet, we've been meaning to do that.

And so what a buy-sell agreement is, and where it can be helpful just to know, is let's just assume that you and I are in business together. We're 50 50 partners. Well, if we don't have a buy-sell agreement and something, God forbid, happens to me, then all of a sudden my portion of the business goes to my spouse, and now all of a sudden Phil is in business with my spouse. And he may not want to be in business with my spouse, and my spouse may not want to be in business with you. So now we have to figure out, okay, how are you going to get the capital to pay off my part of the business? Whereas if we have a buy-sell agreement in place, we own insurance on each other. God forbid something happens to me, you get the life insurance proceeds, you pay it to my spouse, she gets the capital she wants, and now you're 100 owner.

Has your company been appraised? So that one, you'll need an appraisal for the buy-sell, because you want the right valuation of the business. You want to have some type of formula built in. Maybe you can talk about a few of the different formulas, because you don't want to have to get an appraisal every single year. And if you have an appraisal this year, well, the value of the business next year will be different, and then the following year will be different.

When you're doing a buy-sell agreement, likely you've either taken on a partner or you're about to. Otherwise there may not be a reason for that agreement. So when you take on the partner, we've got to do a valuation to know what it is that they should be paying. So you get the first one done, and you could spend three thousand, five thousand. I've seen valuations as much as ten thousand. You don't want to deal with that every year.

So once the buy-sell's in place, you build a formula into that buy-sell. And so most of these buy-sells would say we can have our CPAs. The person maybe that passed away, their family would have the right to bring in a CPA of their choice, and if I was the partner, I could bring in mine, and might start with mine. And if they don't agree with what my CPA brought to the table, then they can bring theirs in, and then we would go through, if necessary, a mediation to reach an agreement.

So all of that can be written into a buy-sell. The reason you do it is so that no matter what, everybody is protected. You can run the business without any of these things keeping you awake at night. And when you can focus on the business, that's how you make a business do all the things that your long-term goals set out for that company.

And then that feeds into the next topic on business planning, succession planning. We see it all the time with the dentist offices that we work with. It could be, if someone is looking to retire in, say, three or four years, you may have them become a 24 and a half percent partner year one, 24 and a half percent year two, so they don't have more than 50 percent, more than the majority.

If you don't have a good succession plan, you build this business for 20, 30, maybe 40 years. And you brought up dentists, and so we serve a lot of dentists, and some of these dentists that we work with, they've been in business 35 years. And so, one, you wouldn't want to just let that business fail, right? You wouldn't want to just all of a sudden retire or become disabled and not have a plan, because all of that value could go away very quickly.

And having a succession plan is not just knowing that you've got an associate in there to take it over, but it's knowing how you're going to bring in that person, when you're going to bring them in, and if something happens prior to you bringing in the associate, there's someone outside. And that's so important because your spouse, one, is perhaps expecting that, might need it to complete their retirement needs. And on top of that, you've spent a lifetime building it, so you would never want to see that go away.

When I think of business owners, I think of the challenge of being a business owner. It's the backbone of America. It's difficult to run your own business, but if you've planned properly for your business, it can be much more rewarding.

Business owners don't always think about these things, and that's normal. They're not supposed to be experts in all of these things. They're great at what they're doing in their business. Small businesses are the backbone of this country, and so helping them plan better, I think, is incumbent on people like us. We have to bring that to the table.

A couple of things for our listeners to think about. One, recognize that you may not know what you don't know. If you're having a hard time with something and you're not able to really see your efforts making a real difference in certain parts of planning in your business, or if you think maybe you've just left certain things out, get some help. Hopefully we prompt you to reach out. It doesn't have to be us, but reach out to someone and make sure that you've got your business buttoned up. Let the business planning element be a real element in your wealth management.

There's so many layers to each of these different elements that if you need help, if you have questions, again, it doesn't have to be us, but we provide what we call a second opinion solution, where we dig into all of these elements and we provide a report card showing you how well you're doing in each of the elements and what the opportunities are. So we say if you optimize your business, you maximize your wealth.

Absolutely. That's when you can see exponential growth, and it's when you get that wonderful feeling of knowing that your hard work has paid off and that things are in order. You de-risked to the point that you can, your family is protected, you

get all of that put together, but you can't do it unless you go through all the elements. We certainly appreciate the view. Appreciate all of you watching. Be sure to like, share, subscribe to our channel so you get more content. We'll talk to you soon.

Thanks for joining us on We're Talking Money. If you'd like to learn more, check us out at omnistarfinancial.com. Subscribe to the show on YouTube. Follow us on Instagram and Facebook. Tell us in the comments section what topics you'd like to hear in upcoming videos. If you enjoyed the show, give it a thumbs up and share it with friends.