A nest egg or business re-investment?
If you are at all like many other dental business owners - particularly those with young, growing operations - a large portion of your personal assets are invested in your business.
By Mark E. Battersby
Investment planning involves finding the best type of investment for the income generated by your business
If you are at all like many other dental business owners - particularly those with young, growing operations - a large portion of your personal assets are invested in your business. For some, this is necessary to ensure the survival and growth of the operation. Others, however, are faced with the question of whether to plow the profits back into the business or establish a separate nest egg.
One of the main reasons you chose business ownership was to enjoy a certain standard of living and personal wealth. Today, that established dental business probably generates a major part of your income. Your business deserves your main attention and priority, both in time and working capital. However, it might be time to think about investment planning.
Investment planning means finding the best investment for the income generated from your dental business. Which investment vehicle you choose will vary depending on your desired lifestyle, temperament, goals, and the time you have to achieve these goals. The investment planning process never requires you to pull back from the business, but it does help you build the capability to do so.
A diversified investment portfolio warns against putting all eggs in one basket. By having several kinds of investments, such as stocks, bonds (both general and corporate), real estate, and perhaps precious metals, you greatly reduce the chance that a particular economic or legal change will devastate your investment fund.
Your profitable business as an investment vehicle
Have you examined your dental manufacturing operation or sales business as an investment vehicle, as opposed to the business serving as your own job replacement gadget or service to customers? Examining your business as an investment vehicle helps you gain another vantage point from which to evaluate and fine-tune the operation. It will also help you decide where your extra savings or business profits would produce the best return.
It should not surprise most business owners that small businesses are a growing industry. U.S. government statistics show that about two thirds of the country’s economic growth in the last decade occurred in the small business sector. Your successful small dental business may be the most profitable investment you make.
However, business owners often want income from sources outside the business. A second source of income, whether it’s dividend and interest income generated by a nest egg or income from another business, is a good “safety net.” It is important to choose how you invest. Re-investment in your business might help insure its success. Or should you invest to provide that safety net?
The ultimate payoff from a business
Not so long ago during the so-called dot-com age, the grand prize for many Internet companies was the initial public offering (IPO). Although IPOs are enjoying a comeback, they may not be a realistic or desirable goal for many dental manufacturers and dealers. Preparation for the moment can help even the smallest manufacturer or dealer reap tremendous benefits.
Preparing for the day when you will convince the investing public to buy your business stock over the competition is a meaningful exercise. Why? By examining your business as an investment vehicle, it can be compared with other investment vehicles that are available to both you and other investors.
Possessing great investment characteristics is not the be-all-and-end-all of your business. Past performance, vision, leadership, and intangibles such as innovation, culture or market conditions are all considerations for potential investors, who look not only at past numerical facts, but at the nature of the business, as well.
Second, while investment philosophies are varied, translating an adequate income into meeting your economic goals begins with planning. Through the development of a personal financial plan, you will be able to reach your monetary goals by deciding how best to pay yourself, spend and invest your money, and take advantage of tax saving opportunities.
Business investing options
Investing in the dental business can take many forms. For example, properly structured business loans can provide a higher rate of return than depositing the money in the local bank. If tax saving opportunities are factored in, another option - owning the building that houses the operation and leasing it back to the business - emerges. This strategy can generate rental income and tax deductions.
What type of income best fits into your plans? This is where that all-important financial plan comes into play.
A successful financial plan should let you choose between allocating business profits back into the business or into a more diversified portfolio. In other words, your financial plan should do what your business does: increase your personal wealth.
Financial planning should enable you to rely less on earned income (the income that you derive from your business) and more from unearned income “outside” investments, such as stocks and bonds.
Most financial plans involve five steps:
1. Identify what you already have. The first step is an inventory of your wealth, income and expenses, as well as any existing planning documents such as insurance policies and wills. You must know where you are financially before you can organize future goals.
2. Decide what you want. You have to set your goals and quantify them in terms of dollar amounts and the time you have to achieve them. Admittedly, establishing a dollar figure in order to maintain your present lifestyle down the road can be a complex process involving inflation and future value. Keep it simple by thinking in today’s dollar value.
3. Determine how to reach those goals. This is the heart of the financial plan. You must figure out what to do to achieve your goals - or adjust them so that they become attainable.
A 55-year-old business owner establishing a financial plan to retire in 10 years cannot achieve financial security by placing money in today’s low yielding savings accounts. Similarly, although risk is generally equated with return, few dealers or manufacturers risk their investments with stock in startup or fast growth companies.
4. Implement the plan, which may be the most important step. Many think about a plan, but few actually implement one.
5. Maintain your plan. Even the best financial plan can sour with age. You need to keep your plan up-to-date by making sure that your investments perform as expected, and adjust your financial plan for changed circumstances.
Properly handled, the investment planning process should not in any way require you to retire or pull back from your business at any time; it does suggest that you should build the capability to do so if you choose.
Put it in writing
The importance of financial planning should not be underestimated, but it should be in writing. If you write it down, you will not have to try to remember all of the factors that contributed to your plan. If circumstances change, updating your financial plan will require much less time and effort.
For any business owner uneasy about implementing a financial plan, a legion of professional advisors can help: lawyers, accountants, financial planners, stockbrokers, bankers, and insurance agents. You can ask for help on a particular part of your plan, or a general review of the plan may be warranted.
Some financial planning professionals - including some highly qualified and competent ones - are skeptical or hostile to financial plans prepared by someone else. If this is the case with a particular professional, you will hopefully learn about it during your first meeting. Shop for an advisor as you consider whether to re-invest in your business or create a separate nest egg.