Your Business Your Wealth

Cory Shepherd, Paul Adams

• Publisher: Cory Shepherd and Paul Adams
• Year: 2020
• ISBN:
  9781087901541
• Edition: 1
• Topic: Business
• Subtopic: Wealth Management
• Index: Business

How many business owners do you know? If you're an entrepreneur like us, you can probably find 100 or more just by scrolling through your LinkedIn page and other social media.

Next question: How many business owners do you know who have the kind of freedom that would allow them to travel for a year? Or take a six-month sabbatical from work? Probably not many.

Now for the kicker: How many business owners do you know who have sold their businesses and have been retired for a decade or more? The retired business owner who simply gets "mailbox money" to support their lifestyle is like a baby pigeon: everyone believes they exist, though most people have never seen one.

As managers of a successful financial strategy and investment planning group aimed specifically at entrepreneurs, we can tell you unequivocally that they are real. Over the years, we've helped countless business owners retire with more than enough for their families to be both secure and happy. With this book, you could be one of them.

Part 1:
Avoid the Entrepreneur’s Trap

Chapter 1:
Your Business Is Amazing—
and It’s Not Enough

The title for this chapter isn’t a personal jab. (How could it be? We don’t even know you.) For most business owners, though, it is an accurate statement.

As entrepreneurs and business owners ourselves, we know what it takes to start a business and the feeling of pride when it is successful. We started Sound Financial Group to educate our clients about how to keep more of the money they earn, and it’s grown beyond our wildest dreams. But we also know that selling the company one day will not be enough, by itself, to ensure we are able to provide for our families for the rest of our lives.

In this chapter, we’re going to dig into why your business is not enough. We are also going to explain why so many entrepreneurs miss this—and what it costs them in the long term.

Entrepreneurs Are the Exception

Did you know that only about 6% to 14% of the world’s population are entrepreneurs? The larger number is probably a bit skewed, too. That statistic comes from the Global Entrepreneurship Measure and includes people who are currently at a job but considering entrepreneurship, not just those who already own their own businesses. In any case, we entrepreneurs are a very small part of the population, despite the fact that companies that employ fewer than 500 people account for 95% of all businesses.

Think about that for a moment. The majority of all businesses are owned by entrepreneurs. As individuals our numbers are small, but as business owners our impact is absolutely massive. We drive innovation, bring new products and services to market, and employ tens of millions across the country.

However large our impact, the fact is, successful entrepreneurial ventures are the exception, not the rule. If you followed every company that gets started this year, only about 20% to 30% of them will survive a decade. Keep in mind, too, that “survive” just means the business is operational and filed a tax return. It doesn’t say anything about whether the company is actually successful. If you used a different metric—say, the threshold a company has to hit in order to join an organization like the Entrepreneurs’ Organization, which is more than $1 million in revenue—that 20% to 30% number plummets.

Here’s another way to look at it. Back in 2014, Paul Adams spoke to a group of Seattle Entrepreneurs’ Organization members. There were about 35 of them gathered around the stage, and it dawned on him that, given the 20% to 30% survival rate statistics, roughly 175 people had to have started businesses a decade earlier in order for that group of entrepreneurs to still own a business today. It gets worse (or better, depending on your side of the curve) if you think bigger: all the businesses in that room generated over $1 million of revenues per year, meaning 3,500 businesses had to have started, to arrive at this small group of high-performing survivors 10 years later.

As a successful entrepreneur, you are a rare breed. But most of us don’t see ourselves that way. For one thing, you’re probably not focused on other people’s success—or lack thereof. You’re focused on your business and making sure it continues to grow. That focus is probably one of the reasons your business is still in operation. At the same time, when you do look around at your peers, the entrepreneurs who didn’t make it aren’t there. You’re only seeing the success stories. The failed businesses disappear, replaced by the ones that make it.

Don’t forget that you’re the exception, and as such you have unique challenges to deal with that the rest of the population never has to think about. As we’ll delve into shortly, your financial future depends on recognizing that entrepreneurs need to plan differently than everyone else does.

High Financial Rewards Don’t Translate into Long-Term Financial Security

As you are probably aware, one of the biggest benefits of being a business owner is that you have the potential for an unlimited income. There’s no one above you to say, “This is how much you’ll make this year” or “Here’s how much we can afford to pay you.” You could, quite literally, earn as much as you want.

Sure, increasing your income demands increased work, but at the end of the day it’s up to you how much you put in and how much you take out of your business. Most people who work for someone else can’t imagine what that’s like. It’s an amazing feeling. Maybe you’ve experienced it firsthand, too. You realized you wanted to buy a new home—even a second home. Maybe you just wanted to add more to your child’s college fund, or you have set your eyes on a new boat.

It is this key upside of being an entrepreneur that can blind us to the truth about what our financial planning requires. Though it may feel this way sometimes, your income is not actually unlimited! Your income potential over the life of your business is higher than most others, but it is not infinite. For perspective, picture a giant bucket sitting next to the front door of your headquarters, containing all the revenue your business will earn over your lifetime. You don’t know exactly how large the bucket would need to be, though in some cases it would be a very large bucket indeed. Nonetheless, it is not infinite.

We don’t bring this up to break your spirit, but to help you realize the opportunity. Most people who sell products and services to your business want you to think of that income as unlimited so you are more freewheeling with the business checkbook. We may be the lone voice in your world urging you to understand and own the finite nature of your resources. This is because anything that is valuable must also be scarce. If every decision to deploy capital is made with that large-but-not-endless bucket image in the back of your mind, think how much more strategic you might be with your long-term growth planning and daily spending decisions.

Of course, there are plenty of other perks besides near-infinite income potential. For example, when you go on vacation, you may take the opportunity to scope out real estate that could be used to expand your business. As a result, you get to write off part of your trip as a tax deduction. If you go to a business conference, you can bring your family to spend time together. You can make a mini-vacation out of it while still enjoying the write-off you’re entitled to for the business expense involved.

Most entrepreneurs wisely use their businesses to purchase their vehicles, too.

The list goes on and on, but all of these benefits of being an entrepreneur—including the high levels of income we’re able to achieve—don’t automatically translate into sufficient amounts of money for funding the rest of your life.

This is why it is incredibly important for your future that you understand how your personal balance sheet differs from that of anyone who doesn’t own their own business.

Understanding Your Personal Balance Sheet

When we say, “personal balance sheet,” we are referring to your personal finances—not your business’s finances. We continually remind clients, “You build financial independence on your personal balance sheet, not your business balance sheet.” We will even take it a step further: you will never have the independence or autonomy you first desired when going into business, solely on the strength of your business balance sheet. Your business exists, and has always existed, for two reasons. One is to make real the specific kind of impact or change in the world that you were meant to make. The other is as a tool to create the cash flow you require for all your other needs, wants, and goals. All autonomy and freedom to “Design and Build a Good Life” (a phrase you will hear more about from us) will stem from personal cash flow and personal balance sheet management.

The Entrepreneur’s Trap

Imagine for a moment your life in a very different situation: instead of owning your company, you are an executive at a large corporation. You get a regular paycheck, and you have a 401(k). If you’re a high-level executive you might own company stock, but you understand you’re not going to see a huge payout if the company is sold.

No one in that position thinks for a moment that the company they work for will provide the cash flow they need for the rest of their life. When a successful executive working for a big company doesn’t save for retirement—year after year—other people find that irresponsible. They warn them to get their act together and remind them that, someday, they won’t be getting that regular paycheck.

Unfortunately, this is often not the case for entrepreneurs. While we have our own perks like tax write-offs, we don’t have company-funded retirement plans. Even worse, our culture applauds the entrepreneur who reinvests every single dollar they have back into their business. “Good for you, keep believing in yourself,” they say, as they celebrate the ideal of the solitary, self-made American hero taking on the world.

We urge you to celebrate your success in a different way. Recognize that after a certain stage in your business, “Putting money ba...