Market-Ability refers to another means to make your business more marketable. If you think about it, your business presents a best in class offering to your customer base. You spend all of your time and money making this appeal to your consumer base. The problem is that while that helps drive sales, it does not always relate to how your business appears to your peers.
When building a world class company, you have already developed your product or service. Now you have to build the company behind that product or service. There is a hiding place in every business that covers the value process. It usually resides in the business valuation model. Have you ever looked at how your business is valued by others ? In other words, how would a bank value your company ? You need to know that, because if a buyer comes along that wants to work with you, rarely do you find they are open to pay cash. They typically need financing, and the only place for that in the real world is the bank.
Banks typically look at your financial statements. They want real world viewpoints, not the latest profit and loss that you produced. If you are large enough, they will want audited financials, which present another challenge. In addition to that, what if you are paying expenses from your company that typically should be paid personally? Well, that might mean you save a little tax, but your value may be hindered greatly.
What if you have team members that are not working as efficiently or a passionately as you would like ? Remember, everything you do shows up on paper, and inefficient employees will show up frequently. I once worked with one of the fastest growing golf companies in the country. What got their employees motivated was that they quarterly bonuses were based on how close the company came within their budget. It really helped their bottom line, since they were really a real estate based firm, and their profits usually showed up in an increased property value.
If you want to increase the value of your company, you need to first investigate how the company is valued by others. You can hire a valuation firm, and they are very efficient, and very expensive. There are less expensive ways to start, and surprisingly, all of the basic valuation tools are on line, and there is more known about your company than you might think. One firm we work with, already has a public valuation tool in place and provides a scoring process (similar to credit scoring) and can instantly show you how you appear in comparison to your peer group.
Have you ever wondered why you think your business is more bankable than your bank does?
Let's start by looking at the actual definition of "Bank-Ability"
Project or proposal that has sufficient collateral, future cashflow, and high probability of success, to be acceptable to institutional lenders for financing.
Your business gives you the highest probability of success, comfortable retirement, stress relief, as well as the highest rate of return for you to invest in. So you do that, you invest, and invest, and invest again. Why doesn't your bank see it the same way ? Are you at the wrong bank ?
Probably not. Your bank just has a different way of looking at your business than you do. So, I pose you this question:
Is it the bank, or is it the culture of the bank ?
The reality is that unless you have done something unique or inefficiently in your business model, it is likely the banking culture.
How can we address this issue, and make your business as bankable to the banking institution as it is to you ? Let's look at this for a minute.
1) You started your business because you had a greater passion for the product or service you have developed, moreso than you had a passion for the company you were working for.
2) You built your company to replace your lifestyle, and every time a self employment based perk presented itself, you took advantage of it.
3) Your skill set lies in your chosen trade, not in the ability to manage the people that you have elected to work with, and pay for their efforts.
4) You have hired the outsource services, that you felt were the best for your business model (Accountants, Attorneys, Financial Advisors, etc), and you often get information that creates a conflict between the advisors.
5) Your primary form of collaboration, means that you have set up another office party for good will.
The key element to making your company more Bankable, is to understand the source of your problem. By talking with your accountant, you can find the source of excessive revenue, and look for a means to reduce the taxation. By meeting with your attorney, you can find ways to protect your assets...maybe. But every time you do any of this, your company looks less attractive to your bank.
And your bank is one of your most valuable partners. What we are driving at is most business owners are placing the cart before the horse. By focusing on business valuation, you can uncover the opportunities that are not readily visible. Using a value based approach to "Bank-Ability" you will uncover tax savings opportunities that actually increase your lifestyle based business operation. The value based approach will also uncover inefficiencies in how your team works collaboratively, and not only will it save you money, it will uncover time saving mechanics that you never imagined.
By using a values based approach, you will bring your advisors together on the same page, and everybody will enjoy newfound collaborative powers at a lower stress level. What is not widely known is that business value and valuation is coming to the forefront more and more with Artificial Intelligence and the tools on the web. For years we have placed our faith in the historical approach to business valuation. Today, there are more and more tools available, in fact, we have recently found a service that uses all of these public tools to create a scoring system to evaluate your current
business value, and it compares that to your peer group companies. This, in turn, allows you to garner a greater understanding of how to adjust or fix the things that need attending to. Imagine, being able to watch your business grow the same way we watch your credit flow. Once we determine the systems that are becoming more and more public, we learn how to make our company more "Bank-able". And isn't that what we really wanted when we started on this journey.
As American workers and entrepreneurs, we work hard for our money all of our lives. If we do this right, not only are we working hard, but our money works hard for us, especially in our "Accumulation" years. Let's call that our time for our assets to "Ascend" towards fulfiliing our goals in life. That is what we are all taught, all of our lives.
Save, save, save, and save some more. I once heard a well known author tell me, very succinctly, "Nobody gets wealthy saving money. Great wealth comes from leveraging the money you have saved". I firmly believe they were on to something. Just think about the leverage you gained when you bought your first home. You probably put 3 - 20% down, and watched it appreciate at the full value, not the value of your down payment. Then you got to leverage that further, by depreciating the home, and buying up to a bigger home and the next one, without having to pay tax on the earnings. When we grow our assets to the maximum levels we can achieve, we often forget who our partner in the accumulation (ascention) phase of our financial lives. If we place money in government sponsored retirement plans, such as IRA's or 401k's if we are lucky, we own 75% of those funds. If we are not so lucky, we own 50% of those funds. If we do it wrong, we can lose all of the money with excise penalties. The government owns the other portion of that, in our taxes due.
Let me phrase that another way. "If you could predict the exact day when your retirement account would suffer its' greatest loss, when would you want to do something about it ?" The sad part is that we know that day, and yet we still do nothing to avoid it.
What is "Spend-ability".? "Spend-ability". (a phrase I coined based on my experience) is the difference between someone who earns a dollar and is able to spend fifty cents of that dollar, and somebody who earns that dollar, yet is able to spend seventy-five cents of that dollar (or more). It’s not how much you make; it’s how much you can spend. How much of your hard-earned money can you actually spend? How much do you actually keep?
Working all your life to save and invest your money is what I call the Ascent into your dreams. Typically, the ascent usually is hindered by what happens when you attempt to liquidate those accounts and spend those assets on yourself, your family or your dreams.
The "Descent" is the time you use to enjoy the fruits of your labor. This is equally important and sometimes even more important than the "Ascent". This is where, if you have chosen your partners correctly, you can enjoy spending 75 to 100 cent dollars.
There are several ways to accomplish this. The most popular way is to create a Roth IRA with substantial assets. That does not happen by making the maximum contributions each year, but if you have substantial assets inside a retirement plan, you can find a way to convert it to a Roth plan, then all of your future income from that plan is completely tax free. One of my clients heard about this, and spent a lot of time and due diligence to see how that applied to his investment in a private company. After an exhaustive investigation, he conferred with his high powered CPA firm and myself, to justify, that if he paid tax (out of pocket, not from the plan assets) on the $1,000,000 in his plan, and converted it to a Roth IRA, then “if” that private equity went public, and if it hit $10,000,000 it was all tax free from that day forward. It was then that “his” light bulb went off, and he ponied up an additional $500,000 in tax money to fulfill this. I would only recommend that if the private equity he purchased was in his mind, as solid as they come.
There are many ways to use the Roth platform, and what I recommend is to look at that, as well as other Hybrid Roth style programs. Please, exercise caution, as there are many scams out there looking for your money. If you believe in your investment opportunity, it is likely better to pay the piper now, and enjoy the rest of your money without having to worry about unwanted partners in life. And if you want to stretch this into your kids inheritance, it works well there too. At least it will feel better than bringing the government into the life of your children.
Scalability is one of the most important factors for entrepreneurs considering starting a new business or hoping to take a current business to the next level. Successful business growth depends on a scalable business model that will increase profits over time, by growing revenue while avoiding cost increases. Keeping this low-cost, high-profit goal in mind, consider how the business model will affect the bottom line when you expand offerings. Does business output always require increased input in order to grow? Does the business need to hire more employees any time sales must increase? These are the first questions to consider when you're considering expanding your business.
Linear growth can be slow and expensive.
Did you answer "yes" to the questions above? Then your business model may not be scalable in a way that yields greater efficiency and profitability over time. Take a step back and decide whether investing in linear growth that consumes resources will be commensurate with the increased revenue. Businesses can grow without scalability, but they won’t achieve the increased profit margins of nonlinear growth models. For example, if a business requires hiring more employees every time sales must increase, the business model may not disconnect sales growth from cost growth. Expansion means increasing costs to support the additional sales. The message here: Search for ways to avoid this linear model.
Exponential growth can be the key to success.
Highly scalable businesses grow exponentially. They are not weighed down by the same sales-cost growth relationship as linear models. Instead, as sales increase, costs stay flat, allowing for higher levels of profit over time. Businesses with high scalability grow with lower capital requirements, making them more efficient and more attractive to initial investors.
Many technology companies, like Google, Apple and Microsoft, have perfected this type of scalable business model. Their initial costs for developing an advertising platform or operating system are high, but once it is on the market, they can sign up users or sell many copies of the related software with relatively minimal cost increases. In order to emulate the examples of such successful, highly scalable business models, consider adjusting your current business model so an initial investment in technology will support exponential sales growth down the road.
Of course not every business is designed for exponential scaleability, and not every business model is easy to change. However, making a few key adjustments can improve the scalability of your company.
The actions of the government, in the form of taxes, will have a bigger impact on your money than almost anything else. And the truth is, income taxes and estate taxes are only two of the dozens of taxes that may affect your future. Just in your day to day life, you face social security taxes, property taxes, school taxes, energy taxes, telephone taxes, capital gains taxes—the list goes on and on. Basically, the only things that aren’t taxed are those that are illegal.
The sheer amount you pay in taxes every year is staggering. Fortunately, there are ways to avoid paying unnecessary taxes, and to avoid more taxes than you need to—ways that go far beyond merely using a qualified plan.
Early in my career, I ran across a letter from United States Supreme Court Justice Louis Brandeis that made a huge impact on my life. The letter read:
“I live in Alexandria, Virginia. Near the Supreme Court chambers is a toll bridge across the Potomac. When in a rush, I pay the dollar toll and get home early. However, I usually drive outside the downtown section of the city and across the Potomac on a free bridge. If I went over the toll bridge and through the barrier without paying the toll, I would be committing tax evasion.
If, however, I drive the extra mile and drive outside the city of Washington to the free bridge, I am using a legitimate, logical, and suitable method of tax avoidance, and I am performing a useful social service by doing so. For my tax evasion, I should be punished. For my tax avoidance, I should be commended. The tragedy of life today is that so few people know the free bridge even exists."
Finding the free bridge is more important today than ever. As I remember it, back in the late 1970s and early 1980s, when Jimmy Carter was in office, tax rates were ridiculously high. If you had an income of roughly $400,000, you would pay a 70% tax on anything over that $400,000. Then, on top of that 70% tax, you would have estate taxes. You could literally walk away with zero dollars. Your kids could literally walk away with zero dollars. Some people were paying up to 90–95% taxes. In my eyes, that’s bordering on communism. On top of all this, interest rates were in the double digits.
In my opinion, this was one of the ugliest times in American history. Home values were in decline, and it was not until Carter left office that things started to look up. When Ronald Reagan came into office, he began to focus on spurring business growth. He started to bring tax rates down, and people were once again able to afford to be in business.
Since the Carter administration, tax rates have plummeted to an all-time low. We are now in the lowest marginal tax rate we are likely to experience anytime in the foreseeable future. Unfortunately, the federal government’s only source of revenue is taxes, and the problem is that the government spends more than it collects. The Obama administration has quadrupled the American deficit, and the only way we can pay it down is higher tax rates. The federal debt is growing exponentially, and the labor force in this country is declining, and will continue to do so. Meanwhile, the number of retirees who subsist on government programs such as Social Security and Medicare is on the rise, and those retirees are living longer and longer. There will soon be fewer taxpaying workers than ever. If the government raises interest rates substantially, they will destroy the real estate mar¬ket, and with it, the American Dream. In my opinion, the only answer is increasing the tax rates.
While the current administration has said that they are only going to go after the income levels above $250,000, they have raised the estate (death tax) exemption to $5,430,000 per person ($10,860,000 per marriage). This means that fewer estates are in the estate-tax-paying bracket, and the bigger planning needs now lie in income tax planning. And while the burden is now on the income tax planning, I believe that it is only a matter of time before they go right back and attack the estate. It is all very confusing.
For me, this rising tax environment is a key area of concern. I think that the government knows how money works, and they hide the truth from the general public. If you listen to your par¬ents, you will expect to be in a lower tax bracket when you retire. That is outdated thinking from the 1940s and 1950s, when every company built a retirement plan for its employees. The average employee lived to be sixty-two years old, and the company could use your money to retire your neighbors. This worked well for companies until the entire country started living longer. Now the fastest growing segment of America is the centenarians, the people who live to be 100. All the post-war era money is gone.
If you achieve your financial goals for retirement, you will have at least as much income as when you were working, if not more. If we have increasing tax rates, you could be biting your nose off to spite your face.
Why? Well, let’s assume that you are paying an average tax rate now, say 28 percent (which could be as high as 39%). If you succeed in your financial goals, you should have just as much money when you retire as you do today. This means that when you retire, you will be in the same income range as you are today. Now imagine that the tax rates rise, as is almost inevitable, and the marginal tax rate hits a hypothetical 45% maximum bracket, and you fall into that. Say you were incredibly fortunate and you earned enough to double the money in your retirement plan. You now have twice as much money as when you started. You put your money away in a 28% bracket, so you have saved 28% in taxes on half of it. But when you pull it out in retirement, the value is much higher as your money grows, you will be paying 45% on the whole thing. Why would you want to save money from taxes in the lowest tax bracket you have ever seen, just to grow that money tax deferred and take it out in a higher bracket?
I once heard a wise man say, “Rich people think like rich peo¬ple, and poor people think like poor people.” It is my belief that the biggest difference between the two is that rich people know how money works and can figure out how to make the adjustments to save taxes, leaving the heaviest tax burden to the masses.
Mandy and Gabe came to me just in advance of Gabe’s re¬tirement date. Their concern was the effects of an increasing tax environment in retirement. Gabe had worked forty years as a successful engineer in the aerospace industry. He did not want to see all of his hard-earned income and assets go to the government with a new administration on a spending spree. They had about $1,000,000 in retirement funds and about $7,000,000 in assets, including a substantial real estate portfolio. Gabe’s goal was to use the declining real estate market to leverage his retirement income, even though his employer took care of most of his incomeneeds, at least in the beginning of the retirement phase.
At the conclusion of our analysis and after our work with tax and legal counsel, $200,000 was re-characterized from taxable income to tax-free profits in the combined Roth IRAs for Mandy and Gabe. Another $30,000 was converted to a tax-deductible format using the other plans within the plan, including a fully funded program to put their four grandchildren through college in the years to come. This is just an example of the results that can be achieved with a successful plan. Your results may vary, simply because every situation is unique.
In another case, we ran into a mess of a different kind, one in which Sam asked us to manage his pension plan. We came in as a replacement advisor some years back. He gave us over $2,000,000 to manage but was also still making contributions to the plan. The problem that we didn’t realize was that the tax counsel he was using was had a too highly leveraged platform to make the contributions he was making. It all came to light when it was time to close down the contribution phase and work on the income phase. In the process of developing an investment strategy we got lucky and experienced a good market, with earnings of almost 40% over a 2-year period. Anywhere else, we would have jumped for joy with that return.
The problem arose that his salary base did not support the income requirements, and as such, the returns generated a $1,000,000 over funding. That caused what we expected in a 50% combined tax rate, plus a 50% excise tax on the $1,000,000 of overfunding. Had we not caught that, we would have continued to build on the problem with any additional returns on the investment.
The solution came with a collaboration of talents using myself, the tax attorney, the new accounting firm, and the Third-Party Administrator and his actuarial team. By using some of the capital to buy his life insurance needs, we were able to slow the bleeding and place a need in a more efficient place for him. The next step was to amend his income tax returns to show more self employment income in the years he needed, so he could qualify for the higher income payout level. It did cause a small amount of additional tax from self employment taxes, but that was minimal in respect to the cost of the excise tax penalty he would have suffered. We also had the ability to move the assets effectively to a defined contribution (401k) plan and get some substantial breaks in the process.
There are solutions to the problem of rising tax rates. I think that we are all brainwashed into thinking we need to use government savings plans in order to survive. These plans are marketed by everyone from banks to brokers. But more often than not, if you look closely, the tax savings and deferral programs sponsored by the government end up helping the government and the com¬panies far more than they help the taxpayer. So, if putting money into a retirement account isn’t the solution, what are the other options for saving money on taxes? There are myriad possible ways to use your retirement plan to pay for things with pre-tax dollars that you would normally pay for with after-tax dollars.
Remember, qualified plans were designed by the government for the benefit of garnering additional tax revenue. If you save $1 of taxes, and that saved money grows to $10, the government just added a lot of money to their revenue stream. Qualified plans were designed with the worker in mind. That relates to the 99% of the American public and does great things. If you are in the 1% (affluent market) you have little need for the qualified plan and can do much more efficient things with your money than build a nest egg for the government.
First and foremost, take as much of your income used for non-deductible expenses as you can and find a way to make them deductible. The self-employed world has been doing this for years. You may be able to make all of your out-of-pocket medical, dental, vision care, and child care expenses pre-tax. You may be able to pay your life insurance premiums from a tax-deductible source. You may be able to move your credit card debt to a source that can be deductible. The list goes on.
You just need to find a way to get the government to par¬ticipate in your plan. Most people simply want a hard cost re¬duction. The affluent, however, know how to make traditionally non-deductible costs deductible. Learn how money works for the institutions and government, and you will see how you can make them your allies, and possibly take all those savings and put them into your future. Use retirement plan rules to your advantage and maximize Roth programs for maximum tax-free growth. If you are investing in real estate and the program is strong enough, you can even take a Roth IRA with little money in it and convert it to a self-directed program that could leverage your tax-free savings into a retirement opportunity.
Does the government pay you a substantial tax refund everyyear? You may want to consider that an interest-free loan to the government every year. In fact, the only reason you get a refund is because you overpaid during the year. Then you ask for your money back when you file the tax return. Does the government pay you interest on that money you loan them? No. They don’t even thank you for using your money while they had it.
Why do we have to work so hard to get our tax refunds at the end of the year, when in reality that money should have been ours all along? Think about the size of your tax refund. For an average income, that refund is probably a couple of thousand dollars at least. Now imagine how useful that money would have been if you could have used it over the course of the year! Many people could use that money to pay the high interest rates on their credit cards, instead of allowing it to accumulate while the government uses your money.
What we want to do is maximize what you do during the year in order to minimize the amount you are overpaying the government. That way you get to use that money during the year, instead of the government using it free of charge. Take control of your money and your future, or they will. Learn the ins and outs of how money works, and you will make government and institutions your allies.
Banks will loan directly to your retirement plan on a non-re¬course basis. Let the risk lie with the government, not your per¬sonal assets. As a matter of fact, one of the key things we teach while building great wealth is to protect the wealth you have now, as well as the wealth you are targeting for your portfolio. It is a well-known fact that government makes the rules that you are told to follow. I believe that when you learn how money really works, you can learn how to use government rules and government money for your retirement, instead of contributing to excessive government spending, as many people are doing right now.
It has been said that saving money won’t make you rich but leveraging the money you have will. Take the risk off of your back and stop bleeding cash on your taxes!