Are you aware of traps that can cause you real pain down the road if your financial plan isn’t done properly? I am sure you don’t want to get to the end of your business life and then realize you really don’t have enough money after all. So, do yourself a favor and listen what I find all the time when I watch other financial planners work with private business owners.
You’ve heard me talk about the need for you to have a financial plan. You may not have heard me talk about the traps that can cause you real pain down the road if your financial plan isn’t done properly. So here’s what I find all the time when I watch other financial planners work with private business owners. I might ask you if you’ve done a financial plan, and you’ll likely tell me, yeah, I’ve done a financial plan. And when I ask to see the plan, I almost always find some major flaws, flaws that are so bad, that if you follow this plan, it’s almost a certainty that you would have a really bad outcome. And that’s something you don’t want to do.
You don’t want to get to the end of your business life and then realize you really don’t have enough money after all.
Hi, I’m Josh Patrick, the founder of the Financial Freedom Project, Stage 2 Planning Partners, the Sustainable Business, and I’m the author of Sustainable: A Fable About Creating a Personally and Economically Sustainable Business.
So I’m pretty sure that you don’t want to get to the end of your business life and find that you really don’t have enough for retirement. And this week’s video’s intended to help you avoid that very unhappy experience. Here are three traps I see with almost every plan I see financial planners put together.
The first trap is, or the first mistake is, the business is valued too highly. Now I know you need a lot of cash to make your plan work, and I see lots of times business owners, and I ask them what their business is worth, they’ll tell me a value that’s three or four or even sometimes five times what the market would value the business at. Now the problem is, most financial planners don’t really know how to value a business.
So when you tell them your business is worth a million dollars, and it’s really worth a half a million dollars, your planner doesn’t know to push back, so they just accept that number.
And the thing that you need to be doing, and what all financial planners should do, in my opinion is, when you tell me what your business is worth, and I think it’s too high, because I can do business evaluations, I’m gonna ask you this question. I’m gonna ask you, would you be willing to pay what you’re asking for if the tables were turned and you were the buyer? Now I see too often that the business owner will say no, but someone else should pay it anyhow. That’s not how the world works.
Here’s the second thing I think is a problem. The plan doesn’t take into account a reasonable deduction for taxes and fees. Let’s say your business really is worth a million dollars. Now most financial planners I know are gonna say, okay, we need to take into the account the taxes when you sell. But they’re gonna use capital gains rates, which is about 20%. Now, here’s the problem with that. I rarely, I mean really rarely ever see a business sell for just capital gains.
It’s always a mix of ordinary and capital gains, and the only way you get total capital gains is if you do a stock transaction, which means you sell the stock in your company.
I want to give you some bad news. No one, and I mean no one, is going to buy your stock. Now I have seen this happen in rare instances, but it’s more like one out of 10,000, not 1% of the time even. So no one’s going to be buying your stock, and you’re going to be selling as an assets share, which means we’re gonna have a mix of capital gains and ordinary income, and I usually use a number for about 30, 40% for that, because that’s what it generally turns out to be. Now if you’re a small business and you’re using a broker to sell your business, there’s a 10% cost for that, and frankly I think if you sell your business, you always should have a broker representing you. So you have to factor that cost in.
And then finally, there’s your accountant and your lawyer. They have to get paid also.
So that million dollars you thought you were gonna get for your business, well you’re probably gonna lose three to $400,000 in taxes, you’re gonna lose $100,000 in selling costs to your broker, and who knows what your lawyer and your accountant are gonna charge, but that’s probably five to $10,000 too. So that million dollars you started off with is really worth five or $600,000 which you actually get to invest and live on in retirement.
And here’s the third trap. The plan usually does not take into account lifestyle expenses, that your business pays. Now as a business owner, we have something that’s really cool. We often live a pre-tax life. We will wrap vacations around business trips, we have dinners out with our clients, who are our friends, we deduct our car, if we can do it, we deduct our health insurance. Those are all things you cannot deduct after you sell your business.
So I’m spending $1,010 a year pre-tax expenses through my business and I’m still gonna do those things after I sell my business, it’s not gonna cost me $1,000, it might cost me as much as $1800, assuming if I have a 40% tax rate.
And the truth is, the standard thought in the financial planning world is that you live on 80% of your expenses after you retire. Well, if you’re a business owner, you don’t live on 80%. That’s just the bad news. The truth is you live on about 120%, because we have to factor the cost in for taxes, and the cost in for expenses that your business is paying.
So here’s my question for you.
Are you willing to move outside these traps?
Why don’t you scroll down and leave a comment for me, and while you’re at it, click on the button below, get your own Financial Freedom Project Cheat Sheet. And what the Financial Project cheat sheet is, it’s the five things, the five stages that you’re gonna go through as you’re moving towards become financially free in your business. Hey, this is Josh Patrick. I’m the founder here of the Financial Freedom Project. Thanks a lot for stopping by. I hope to see you back here really soon.