For newly minted entrepreneurs, the biggest priority is to generate revenue, any revenue in an effort to transition from struggling to profitable enterprise. To those of us who have made the crossing, we have more often than not sacrificed our own financial needs in order to create a proper fiscal foundation for our business. Because so few of us ever get investor capital, we are left to our own devices to fund our enterprises. That’s okay. As that old saying goes “What doesn’t kill us, makes us stronger!”
Unfortunately, we have trouble letting go of this attitude once the business moves off life support and begins breathing on its’ own. Of course this is understandable. Having lived through the tough times, it’s not something we’re eager to revisit. So under the guise of “reinvesting in the company”, we continue to pour our profits back into the organization and rarely do we consider taking it out of the company. Not to spend on toys, but to take some risk off the table.
Considering most business owners hold upwards of 80% of their wealth in their business, this “all your eggs in one basket” scenario is a high risk situation. Ask these same owners if they would invest 80% of their net worth in shares of just one company on the stock exchange and they would certainly question your sanity. Yet these same individuals don’t think twice about their current wealth strategy.
In my case, I had set a target of getting 66% of my wealth outside of my operating company and to provide some for of creditor protection. I did this not because I was anticipating any sort of business crisis, but because I realized I didn’t want all that I had worked for to be totally dependent on the future performance of me and my company.
Okay, so where and when do you begin? The following steps may help you frame your own initiative. Your corporate structure will dictate what vehicles are available to you and by all means consult your accountant, lawyer, financial planner and any other professional you need to maximize the effectiveness of this strategy
- Make sure you’re taking a regular dependable salary. Not your dream salary, but one that allows you to work without the stress of your personal financial situation overwhelming your decision making. In other words comfortably covering your basic needs.
- Begin formally moving a set amount from your current account to your chosen vehicle i.e. holding company, corporate savings account, etc. The formula you choose can range from 5% of all your billings that automatically gets transferred monthly to upwards of 50% of annual profit being transitioned out.
- This money should not be put at risk in another venture. Please see a previous post “The Curse of the Entrepreneur”.
- Although minimizing taxation is always important, it can’t be the deciding factor.
- Eventually you will have transferred at least a portion of your wealth and created another pillar in your financial portfolio.
If you were expecting some magic formula, I’m sorry to disappoint. This is basic wealth management, a rainy day fund, often ignored by business owners. Too many owners are hoping to cash-in when they sell their companies and are devastated when they can’t sell or get significantly less than they anticipated and have no additional source of wealth.
Being an eternal optimist is a necessary ingredient to having any chance of success as an entrepreneur, but it needs to be tempered with a bit of realism. It’s truly amazing the sense of freedom and security you feel when you’ve consciously created an additional source of wealth outside your operating company.
How you do it is up to you, but starting today in small increments is a must, because like a journey of a thousand miles, financial freedom begins with a single small step.
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Copyright © Greg Weatherdon 2012