Exit Planning Tools for Business Owners

preparation

How to Separate Yourself From Your Business – Why It’s So Important

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happy woman working at computer When you run your own business, oftentimes one of the most confusing aspects of the job, especially if you are new to the experience, is understanding how to separate yourself from your business. And this issue can show up in so many ways, from achieving a work/life balance and managing your time to how you get paid and even how much taxes you owe.

With this in mind, here we will offer a big-picture overview of this issue, and in future articles, we’ll drill down to some of the finer details of keeping your business and personal assets separate. Although it might not seem overly complicated or important, separating yourself from your business is a serious issue for every business owner.

You & Your Business Are Separate Entities

The first thing to keep in mind is this: you are not your business, you are not your heart project, your are not your work in the world or even the services you offer. Your business, heart project, work, service, and/or product may feel like it’s one and the same as you, or even as if it’s your baby. But one day, just like the little ones you give birth to, you may want your business to grow up and go on to live on its own without you. Or you may not want that—it’s all a matter of preference, and your decision on this point may even evolve over time.

Either way, this is a good thing to start thinking about now. Do you want what you are creating to live beyond you? If so, you’ll need to start thinking about it as an evolutionary entity that can grow separate from you. And whether you want it to live on beyond you or not, you want it to exist separately from you, because as you’ll learn, there are major tax and asset protection benefits for you by doing this properly.

Owning A Business vs. Being An Employee

To add perspective, let’s contrast what it’s like to run your own business with what happens when you are working as an employee.

The Employee Experience:

As an employee, you get paid via a paycheck, with taxes taken out and a W-2 issued to you at the end of the year. In this case, you and your money-earning vehicle are essentially one and the same.

You earn money, and you pay taxes on that money in the form of income taxes and payroll taxes. As an employee, what comes to you every pay period via your paycheck is yours to put into your personal financial accounts, so you can pay your bills, save, or invest. In that context, you are getting taxed on every dollar you earn.

There are some ways that you can save money tax free as an employee, such as by directing some of your pay into a 401(k), an IRA, or even a Health Savings Account, provided your employer offers such benefits. But for the most part, you are paying payroll taxes and income taxes—which are two separate types of taxes—on every dollar you make.

The Business Owner Experience:

In contrast, when you are earning money through a business entity that is under your control, money comes into your business, goes into your business accounts, and is first used to pay business expenses, which are deductible expenses to your business. When you deduct business expenses from the income of your business, you do not pay income taxes on that income. In this way, you can think of business expenses as a government-subsidized expenditure.

Here’s what I mean: if you can purchase a computer through your business and use it for business, you are paying for that computer with pre-tax dollars, which could save you up to 40% (or more depending on your state) on the cost of the computer, versus if you were to purchase that same computer with after-tax dollars. But this only works if you treat your business like a business, and properly separate your personal and business accounts.

To keep your business and personal expenses separate, your business entity needs its own bank account, its own credit cards, and it needs to pay you. You then always pay your personal expenses out of your personal accounts, never your business accounts. Whatever your business pays you will be subject to income tax and possibly payroll tax as well, though there are ways to significantly reduce your payroll tax obligation by choosing the right way to structure your business entity. Be sure to talk with us regarding how to structure your business for maximum tax savings, if you have not already gotten great guidance on that front.

To the extent that your business earns more money than what’s required to cover your basic needs, you may want to consider investing to hire experienced support staff (especially a skilled bookkeeper and administrative support) to free up your time and allow you to focus on generating more revenue, better serving your clients or customers, and growing your operation. Or you may choose to invest that money in additional education or training for yourself, so you can increase the value (and price) of your services. If you have excess cash flow, you’ll also want to know how to structure your profits, so you pay the smallest amount in taxes legally possible.

Don’t Mix Personal & Business Finances

Whatever you do, do not simply have one bank account that you pay both your personal and business expenses from, or you are going to get seriously confused, and you could even end up losing money or getting into legal or tax trouble, depending on your company’s entity structure.

If you have already paid business expenses out of a personal account, or by using personal credit cards, keep careful track and document exactly how much you paid out from those accounts to your business. This payment will either be an investment in your business that you will want to track for the future, or it will be a personal loan to your business that you will want to eventually have paid back.

Talk with your CPA regarding how best to structure investments in or as loans to your business, and then we can help you properly document your decisions. Or if you need strategic support on this issue, contact us, and ask about a LIFT Business Breakthrough Session, and we’ll look at all of your legal, insurance, financial, and tax strategic decisions together.

When you work with us, as your Family Business Lawyer™, we offer a number of systems and processes that make keeping your personal and business finances separate a snap. Not only that, but we offer additional services that make separating yourself from your business as easy and convenient as possible. Reach out to us to learn more.

Get Clear On Your Actual Financial Needs & Goals

One of the best ways to effectively manage your business and personal finances is to first get clear on what you need your business to pay you at a base level, so you can pay all of your bills and other personal expenses as well as meet your personal time and money goals. To get clear on this, we use a process called Money Mapping. If you haven’t worked with us on this yet, now is the time to finally get a solid understanding of how much money you actually need to reach your goals, rather than guessing or worrying about how much you need to earn to stay afloat.

We’ve Got Your Back

When it comes to separating yourself from your business and managing all of the different aspects involved with this process, you can count on us to provide you with the trusted support and guidance. With our help, you’ll learn how to do this in a way that not only ensures you are doing it right, but that actually adds value to your company and generates increased revenue. Sit down with us, your Family Business Lawyer™ to learn about all of the different ways we can support you in this area. Schedule your visit today.

This article is a service of Todd Jarvis, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business.

What’s Your Purpose in Retirement?

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beach with blue hammocksRetirement can be an exciting milestone. It’s also a major lifestyle change. Oftentimes, your daily workday tasks (professionally or if you run your own business) will likely no longer exist.

Transitioning into retirement for some is an easy process. Perhaps their profession is not their absolute passion, and they always had other pursuits and hobbies they are ready to explore once exiting from their day job. But for others, their profession or business is their passion. They put all their time and energy into it and are dedicated to their profession for many years. Now suddenly, retirement is on the horizon and work is coming to an end. Alternatively, some people have it in their blood to consistently be achieving something, striving to make an impact and difference.

Whichever the case for you, a meaningful life with purpose is a healthy human condition for life fulfillment and longevity. This perspective has been around for generations. Teddy Roosevelt wrote about it in his book, “The Strenuous Life,” written in 1899. To reference his perspective, here is a quote addressing how to live a fulfilling life:

“I wish to preach, not the doctrine of ignoble ease, but the doctrine of the strenuous life, the life of toil and effort, labor and strife; to preach that highest form of success which comes, not to the man who desires mere easy peace, but to the man who does not shrink from danger, from hardship, or bitter toil, and who out of these wins the splendid ultimate triumph. A life of slothful ease, a life of that peace which springs merely from lack either of desire or of power to strive after great things, is as little worthy of a nation as an individual.” – Theodore Roosevelt

Since we’re quoting Teddy Roosevelt about living a fulfilling life, here’s another excerpt from one of his writings titled “Into the Arena”:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

The reason I bring these quotes into this discussion of retirement is that it’s important to remember just because your time spent working up to this point is coming to an end, doesn’t mean you stop laboring or that you don’t need to put effort into new endeavors or into making a difference.

What Are You Going to Do in Retirement?

I was at a gathering recently and in a conversation with two close friends of mine were discussing retirement, and one said to the other, “It’s not whether you can retire, it’s ‘what are you going to do when you retire?’”. He’s right, in my opinion.

The book, “The Magic of Believing,” written by Claude M. Bristol in 1948, wrote of a man he knew: “One man I know who has many achievements to his credit, and who has passed the seventy mark, declared that most people fall by the wayside because they never start anything.

I make it a plan and have for years, to start something new – that is, new for me – at least once a week. It may be only the making of some simple gadget for use in the kitchen, an entirely new sales plan, or reading an unfamiliar book. I find in following this plan not only keeps my body and mind active but also puts to use a lot of imaginative qualities that otherwise might fall asleep and atrophy. This idea of a man retiring when he’s sixty is (in my option) a great mistake.

As soon as a man retires and quits being active mentally and physically, he’s on the way to his grave in short order. You have seen what happens to fire horses when they are retired. You know what happens to your automobile when you leave it outside unused and neglected: it starts to rust and is soon headed for the junkshop. Humans are the same: they deteriorate out or wither and die when they go on the shelf.”

We Need Purpose in Retirement

I have deliberately referenced writings published many, many years ago to point out that this dilemma is as old as time; the human struggle hasn’t changed. We all still need deep purpose in our lives and the ability to make a difference for ourselves and for others to have a fulfilling life. In the practice of helping business owners exit their business successfully, I have heard stories of owners when facing the day of finalizing the sale of their company, don’t show up for the signing. Why? Because all their self-identity and their purpose are in the company they started, grew, and made a great success. To them, parting from it represents an end to all of that and a loss of a sense of control. But exiting doesn’t have to be viewed as an end. But does take careful thought, reflection, consideration, planning, and time to develop a new purpose and consistent passions. For some this is simple, but for others, takes time and consideration. However, it’s a critical area to address. A person who says that finally I’ll have time to play golf will likely find that passion dissipates after a few months and begin to ask, “now what?”

Over the years, our firm has developed a client conversation exercise called “Purposeful Conversation.” Originally, it was developed from our practice of “family legacy development,” We developed our P.C. exercise as a systematized approach to have a deep discussion with a client on “what matters most” to them.

The exercise is broken into three sections: Concerns and Priorities, Commitments and Causes, and Pursuit of Happiness/Life Fulfillment. Each of these areas has nine to twelve potential subjects that a client can consider. We help determine, with the client, the subjects that are relevant and have a deep discussion about importance. This can help them visualize their future, determine their life’s passions during retirement, and help determine what matters most in life. We discuss what makes them happy, what will help them continue to grow, and what brings fulfillment and create a plan now to allow them to focus on and pursue what they desire later.

We also developed a customized workbook to help identify their individual and family values and tie it all into their changing lifestyle.

Pursure Passion in Retirement

Pursuing interests and passions can come in many forms and combinations. Once I took a Lyft from a downtown Denver hotel to the Denver Airport. The driver said that he had started a few tech companies in the past, sold them, and is now driving to meet and learn from other people. I also learned that he decided to learn all he could to master Neuro-Linguistics. This is the study of how verbal and non-verbal language is represented in the brain: that is, how and where our brains store our knowledge of the language that we speak, understand, read, and write. And what happens to our brains as we acquire that knowledge, and how we use it in our everyday lives. I describe it in detail because it’s quite involved! Nevertheless, this gentleman strived to master it and then apply it to his sales training and sales consulting. He told me he was, being hired by companies to facilitate training courses for their sales forces. Wow! Talk about pursuing something else with a passion. I am now connected with him on LinkedIn and learning from him.

You can make a new life in retirement, include whatever you desire, and in a way that brings you maximum fulfillment and meaning. Do whatever “floats your boat,” so to speak.

If you are approaching the runway to land into your retirement years, or the period of your life that transitions you from your profession to your passion, make sure to take time and plan for it. It will be well worth the effort.

I hope you find this article useful. If you have any questions on this subject, feel free to contact me at szeller@zellerkern.com.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

Contingency and Continuity Planning

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When business consultants talk about preparing for unforeseen problems, they frequently commingle the terms contingency and continuity. The terms are not synonymous, and there are important differences between them.

Contingency Planning

Contingency planning is generally accepted to mean how a business will respond in the event of a disaster. This could entail a building fire, severe weather, a strike of key service workers, civil unrest, or riots (depending on the audience.) Additionally, in the age of cybersecurity, ransomware or a denial of service attack, identity theft, and electronic fraud are all well qualified to be categorized as disasters.

Generally speaking, these are all insurable events. Contingency planning often recommends insurance as a major component of preparedness along with remote working capabilities or alternative production resources. In privately held businesses, however, contingency planning has one weakness.

It assumes that the owner of the company will be available to oversee the implementation of the plan.

What if the disaster is at the top of the pyramid? Most businesses need a continuity plan that addresses the sudden absence of the owner. We start the conversation with a simple scenario.

“What if you are hit by a bus on the way to work tomorrow? You are rushed to the hospital, and no one knows where you are. When they find out, it appears that you will be unable to respond to questions for weeks, if not months. How will the business operate for that time?

Continuity Planning

Exit Planning is presumably designed around a voluntary departure from the business, but what if it isn’t voluntary? Where contingency planning looks at a variety of financial risks, continuity planning is focused on the operational problems of an owner’s absence.

Continuity planning starts with the most elementary task-based assignments. We ask questions like, who opens the business? Who informs the employees, the customers, the vendors, and the bank? How are they told, (By email, phone call, personal meeting, or teleconference?) Who distributes funds, draws down the credit line, and signs contracts? Are there specific customers or vendors who will require special treatment?

Additionally, if employees are expected to step up to a higher level of responsibility, will they receive contingent compensation attached to their added duties? Many owners rightfully anticipate that employees will shoulder additional duties out of loyalty, but loyalty has a limit. What if they are in this position for months?

Are there limits on the employees’ decision-making authority? Can they decide on new capital investments, or enter into new vendor relationships? If there is a dollar limit, who has the authority to exceed it if necessary? Who are the key advisors they should consult if they have questions? Is there a compensation agreement with those advisors if they need to be closely involved or engaged for an extended time period?

Contingency and Continuity

These are just a few of the operational answers required on Day One. The owner’s extended or permanent absence will also involve decisions about credit facilities, family income, real estate, working capital, buy/sell agreements, licenses, cybersecurity, and the long-term disposition of the business.

We take a practical look at the issues of an owner’s absence from the business, whether it is planned or unplanned. Continuity planning is just one component of modeling “life after the business.” For the great majority of exit planning discussions, it is a useful but not urgent exercise. If a Continuity plan is needed, however, it may be the most important thing we’ve done for that client.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.