Business owners often under great duress have to make fast, irreversible decisions. It’s best to heed the advice of former heavyweight champion Mike Tyson- Everyone has a plan until they get punched in the face.” Being able to ask good questions at the right time is as powerful as a winning right hook. It requires confidence because often there is no time to check with your “plan.” What’s the solution? Learn and speak the language of money.
Whatever type of financial decision you are struggling with, whether it is saving for retirement, growing your business, stitching together the many pieces of your succession plan, or creating a retention agreement for your key manager(s), there’s a simple and effective way to help you organize your finances in the same way the diatonic scale system helps organize billions of potential sound combinations into music. The process creates a capsule for each of these financial notes so you ask better questions, necessary for implementing your business decisions. I call this artful way to talk about money MoneyCapsules®
Let’s begin by defining each capsule and relate a few key questions you may want to ask your tax, legal, or financial professional and questions for self consideration.
Values: Defines what’s most important to you. Values-‐based decisions make for a more meaningful life.
Key Questions to ask:
What is most important to me now? Why?
What do I need clarity on?
Will the outcome of my decision be aligned with my Values?
If not, it’s probably the wrong decision.
Cash: Is the life blood of your financial health.
Key Questions to ask your succession planner:
How much will I need to fund my retirement? What will it cost me to live for the rest of my life?
Once you have this number determine the Return you’ll need to achieve your cash flow goal.
Return: Represents the total return on all your investments. Estimate the return you will see from your stocks and bonds investments and how that will translate into retirement income. A sustainable percentage from your stocks & bond investments is 3% on the low side, and 5% on the high side. Add social security and rental income.
Assuming you have no other source of income, any gap needs to come from the cash flow your business can generate to support your retirement.
After this analysis, you’ll have a pretty good idea what your business needs to be valued at and how much income you’ll need to reach your personal goals.
Key questions to ask your wealth manager:
How can I maximize the value of my business over the next 5-10 years to fund my retirement cash flow requirements?
Are my investments aligned with my risk for volatility?
Will I need to make any changes in my investments to support my retirement? When should they be made?
Tax: You’re either paying too little tax, or too much tax. Surprisingly, more small business suffer from the latter.
Organize your investments by tax implication.
Key question to ask your tax professional:
How will this decision effect my:
Deferred Tax Liability
Often, the way your business is organized can have devastating effects. For example, if your company is a “C” corp., when you are ready to sell, the sale is subject to double taxation; one for the business, and one for the share holders. Compare this to an “S” corp. or LLC, which receives special tax treatment from the IRS. There is no separate tax for the business. All tax is passed down to the owner(s).
Key questions to ask:
How will the way my business is organized effect the sale of my business?
(If you own a “C” corp.) What are the pros and cons to convert a “C” corp., to an “S” corp. or LLC, and how many years before the sale of my business should this take place?
Risk-What family and or business risks do you perceive?
The 5 Ds:-Divorce, disagreement, departure, disability, death
Key Questions for you to answer:
Will I self manage or transfer risks to an insurance company?
Have you executed or is the following up to date?
Instructions- Power of Attorney, Health Care Proxy, Living Will
Ownership- How are your personal and business assets titled? Do you understand the consequences?
Time-The success of your succession plan depends how much time you are giving yourself to plan- You need time to identify, train and retain your successor. You need time to make sure your company can continue to thrive without you. Rule of thumb is a 5-10 year window – you need time to plan and execute your plan- statistically- 3-5 years is not enough, businesses usually don’t do well in short periods.
Key Questions to ask?
How much time will I need to properly train my employees, so the business can continue to thrive without me?
How will “Time” impact my desire to transfer ownership?
What are your recommendation?
Giving-Tax efficient life time or legacy giving to family, charities, and causes you care deeply about.
Key Questions to ask your legal and tax professional?
Will I need to be concerned about gift taxes?
How does gift splitting work?
Explain gift tax charitable deductions?
What is the Annual Exclusion for 2017?
Would I benefit from a Family Limited Partnership?
Explain the tax consequences between life time gifting, and legacy gifting?