WHAT WALL STREET ISN’T TELLING YOU
CPA, ATTORNEY • WITH RANDALL A. LUEBKE, RFC
vii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv introduction The Difference Between Wall Street and Main Street ................ xvii part i PERSPECTIVE chapter 1 The Entrepreneur Mindset ........................................... 3 Good and Bad Personality Traits of Entrepreneurs .......... 4 Freedom Versus Flexibility .............................. 5 A Better Entrepreneurial Mindset ........................ 6 chapter 2 A Reality Check—The True Value of Your Business ..................... 9 What Is the Dollar Value of Your Business? ............... 10 Building Value ....................................... 11 Changing Markets, Industries, and Trends ............... 12 CONTENTS
viii $ the business owner’s guide to FINANCIAL FREEDOM $ Contents Creating Value Outside of Your Business ................. 13 chapter 3 The Truth About Your Financial Advisor ............................. 15 An Independent Advisor................................ 16 Suitability Versus Fiduciary Duty ........................ 17 chapter 4 What Wall Street Isn’t Telling You .................................. 21 It’s the FEES!.......................................... 21 Problem 1: Annual Fund Operating Expenses (aka Fund Fees) ...................................... 22 Problem 2: Administrative Fees (aka Plan Fees) ............ 23 Three Strategies Your Advisor Won’t Talk About ......... 24 part ii Forge a Better, Smarter, and Safer Way chapter 5 The LifeTime Paradigm and the 4 x 4 Financial Independence Plan ...... 31 Four Sequential Steps .................................. 32 The Four Essential Elements ............................ 36 A Lifetime Paradigm—A New Perspective on Retirement ... 38 chapter 6 Step 1: Optimize What You Already Have .............................. 41 Creating Your Strategic Plan ......................... 42 Building a Wealth Management Team ................. 47 Wealth Management Team Circle ..................... 49 Team Captain ..................................... 50 Board of Directors or Advisors ........................ 51 Meet Your Team Members .......................... 52 Meeting with Your Management Team Regularly ........ 54 chapter 7 Step 2: Dealing with Debt as an Entrepreneur ........................ 57 Good Debt Versus Bad Debt ......................... 58
the business owner’s guide to FINANCIAL FREEDOM $ ix Contents $ Why Entrepreneurs Get into Debt .................... 59 Getting Out of Bad or Reductive Debt ................. 61 Staying Out of Debt ................................ 64 chapter 8 Step 3: Maintaining Proper Cash Reserves ........................... 67 Cash Reserves Means CASH Reserves .................. 68 Significant Versus Liquid ............................ 69 The Three-Bucket Cash-Reserve System ............... 70 Personal Living Expenses and Lifestyle Expenses ......... 73 Adjusting Your Monthly Transfer ..................... 75 chapter 9 Step 4: Investing Your Profits and Building Buckets .................. 77 Phases of Investing ................................. 78 The Perfect Investment ............................. 81 part iii Deploying your assets strategically chapter 10 Understanding the Limitations and Potential Power of Social Security .. 87 The Concept and Reality of Social Security ............. 88 Optimize Your Contributions Now .................... 89 What About My Spouse and His or Her Payroll Planning? .. 90 When You Are Ready to Claim Social Security .......... 93 chapter 11 The Role of Your Personal Residence ................................ 97 Do I Rent or Buy? .................................. 98 Should I Have a Mortgage in the First Place? ............ 99 Should I Refinance My Mortgage? .................... 101 Do I Pay Off My Mortgage Early? .................... 102 chapter 12 Health Care—The Hidden Time Bomb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Health Care 101 and the Heart of the Solution ......... 110
x $ the business owner’s guide to FINANCIAL FREEDOM $ Contents HSAs, HRAs, and the 401(h) ........................ 111 The Cost of Health Care During Your Retirement and the Role of Long-Term Care Insurance .............. 118 Asset-Based Long-Term Care Insurance ............... 120 chapter 13 Self-Directing and Strategic Use of the IRA, SEP, and 401(k) .......... 123 Self-Directed Retirement Account Basics .............. 125 Avoiding Prohibited Transactions .................... 126 The Special Purpose LLC Structure .................. 127 Possible Tax Bite: UDFI and UBIT Taxes ............. 130 Avoid the Naysayers ............................... 131 Additional Resources 131 chapter 14 Why Rental Real Estate, and How to Do It Right ..................... 133 The Art of Buying Real Estate ....................... 134 Is Real Estate for Everyone? ......................... 136 Four Benefits of Owning Rental Property .............. 137 How to Avoid the Common Pitfalls of Real Estate Investing .. 139 Protecting Yourself from Your Rental ................. 144 chapter 15 Vacation Property and Timeshares: Strategies and Pitfalls ......... 147 For Those in “The Market” ......................... 148 Options for Those Already with a Vacation Home ....... 149 Vacation Rental Strategy ............................ 151 Timeshares—Not a Bad Idea ........................ 154 chapter 16 The Proper Role of Insurance in YOUR Plan ......................... 157 Insurance Is Not a Waste of Money, It’s Leverage ....... 158 Two Types of Life Insurance ........................ 160 Living Benefits .................................... 163 Income, Savings Protection, and Tax Diversification— Bank on Yourself ................................ 163
the business owner’s guide to FINANCIAL FREEDOM $ xi Contents $ Super-Charge Your 401(k): The Role of Life Insurance Inside and/or Alongside Traditional Retirement Plans ... 167 chapter 17 What You Should Be Buying from Wall Street ........................ 171 Understanding the Risks of Wall Street Investing ....... 174 Understanding Risk within Specific Investments ......... 175 What Should You Do About Investing with Wall Street? .. 186 part iv exit strategies for Your Business chapter 18 Preparing to Sell Your Business ................................... 191 The Appraiser .................................... 192 The Disclosure ................................... 193 Understanding EBITDA ............................ 194 chapter 19 Pricing Your Business and Increasing Its Value ..................... 197 1. Multiple of Cash Flow Method .................... 198 2. Balance Sheet Method ........................... 199 3. Cost to Create Method ........................... 199 4. Capitalized Earnings Approach Method ............. 200 5. Discounted Cash Flow Method .................... 201 6. Comparable Sales Method ........................ 202 Increasing the Value of Your Business ................. 202 The Unexpected Side Benefit 205 chapter 20 Helping Your Partners or Employees Buy the Business .............. 207 Partners ......................................... 207 Employees ....................................... 211 Take Your Time with Employees .................... 213 chapter 21 How to Find and Sell to a Third-Party Buyer ........................ 217
xii $ the business owner’s guide to FINANCIAL FREEDOM $ Contents Preparation ...................................... 218 Finding a Buyer and Valuation ....................... 219 Disclosure and Due Diligence ....................... 222 Negotiation ...................................... 222 Document Prep and Review 224 Closing and Asset Transfer .......................... 226 Tail Terms ....................................... 227 chapter 22 Selling to Your Family ............................................ 231 Assess Yourself and the Company .................... 232 Pros and Cons of a Family Member Buyer ............. 232 The Process ...................................... 235 Potential Pitfalls .................................. 240 part v protecting your hard-earned assets chapter 23 Asset Protection: Inside and Outside ............................... 245 Where’s the Beef? ................................. 246 Two Types of Risks ............................... 247 Automatic Protection .............................. 250 Targeted Strategies ................................ 253 chapter 24 Cyber Security Risks .............................................. 257 You Are Responsible 258 Continually Under Attack ........................... 260 Take Action, or You Could Lose Everything ........... 261 Basic Cyber Security Countermeasures ................ 263 Advanced Cyber Security Strategies ................... 268 chapter 25 Where Estate Planning Fits into the Equation ....................... 271 Avoiding Probate with an RLT ...................... 273 Estate Tax and the A-B Trust Strategy ................ 273
the business owner’s guide to FINANCIAL FREEDOM $ xiii Contents $ Don’t Give Property to Children—Let Them Inherit It .. 274 Creative Provisions for Children ..................... 275 Disinheriting a Child .............................. 277 The Living Will/Health-Care Directive ............... 277 Top Three Mistakes with “Do It Yourself” Estate Plans 278 Our Financial Freedom Challenge to YOU! . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 About the Authors ................................................ 285 Index ............................................................. 287
PERSPECTIVE
Iwant to put things in “perspective.” There are a lot of misconceptions about how an entrepreneur should approach wealth building and “who” they should work with and rely on.
Throughout the next four chapters, I will share critical concepts, belief systems, and facts about our current financial systems in the United States. I want to encourage you to look at your business and your approach to wealth building with a new set of eyes as we build the foundation for financial flexibility and freedom.
In Chapter 3, I will introduce the co-author of this book, Randy Luebke, a truly “independent” investment advisor. Randy’s insightful comments in almost every chapter will shock and enlighten you as to the realities of trying to build wealth with a Wall Street “mindset.” It’s critical that in this conversation we have an “insider” that can explain the truth about Wall Street financial products, as they will be necessary tools on our path to financial freedom. However, Randy will help me explain which ones to steer clear of and which ones can actually help us as business owners.
As an entrepreneur, you have to look at financial freedom with a different perspective from what Wall Street tries to force upon you. Not every financial product peddled on Wall Street is in your best interest as a business owner, so we need to “Create a New Perspective.” See page 2.
P A R T I
2 $ the business owner’s guide to FINANCIAL FREEDOM part I $ Perspective
Figure I Creating a New Perspective
THE ENTREPRENEUR MINDSET
If you call yourself an “entrepreneur, there’s a good chance you had a lemonade stand or a newspaper route as a kid. Perhaps you tried to sell something door-to-door, invented something, or at least tinkered with a product or service that you dreamed of selling all over America, or even the world. At a bare minimum, you still have a burning desire to work for yourself and to create something from nothing.
This describes me. I love entrepreneurship, but I also know we’re different from most other people. Not richer or poorer. Not smarter or more talented—and certainly not better people than the average wage-earning Americans. We’re just different.
3
C H A P T E R 1
We have a passion and a drive—we want to take the initiative to do something on our own, but this also makes how we approach savings, wealth, and retirement different, too.
I have been fortunate to meet with more than a thousand entrepreneurs every year in one-on-one consultations discussing wealth. In fact, I have interacted with tens of thousands of smallbusiness owners from all over the country as I teach workshops and meet with business clubs and associations. During these countless exchanges, I’ve learned that there are a number of common personality traits amongst entrepreneurs and their entrepreneurial mindsets. Some are good traits, and others are not.
Good and Bad Personality Traits of Entrepreneurs
First, it’s worth noting that successful entrepreneurs are not necessarily born with all the good personality traits to succeed, but they develop them as their passion grows. Conversely, the bad traits, also noted below, tend to dissipate as entrepreneurs become consumed, or even obsessed, with their future business endeavors. Good traits of entrepreneurs include:
$ dreaming big
$ loving what they do
$ an extraordinary drive compared to others
$ having determination and a “never give up” attitude
$ believing that their business is going to make them rich
Do these qualities sound familiar? These are all factors in creating success as an entrepreneur. As fellow entrepreneurs agree, this is what motivates us, gives us purpose, and drives us to not give up.
Common “Bad” Belief Systems or Characteristics of Entrepreneurs
Here are a few characteristics that we as entrepreneurs don’t like to talk about. They can be the “Achilles’ heel” or “kryptonite” for an entrepreneur. Fortunately, most can be mitigated or at least minimized.
4 $ the business owner’s guide to FINANCIAL FREEDOM part I $ Perspective
Kryptonite traits of entrepreneurs might include thinking that:
$ Cash flow, while rarely steady, will work itself out, even with the ups and downs.
$ The demand for my product, service, or industry will always be there.
$ I should reinvest every dime I can back into my business because it’s my best investment.
$ I’ll be able to retire on my business.
I am convinced that these “bad” characteristics and overall mindset are what holds so many entrepreneurs back from financial independence and freedom. The result is stress, inconsistent cash flow, no constructive retirement plan, and oftentimes, finding themselves in serious debt. But, we don’t give up, do we? Determination is generally a good thing, but it can also be blinding us and stopping us from stepping back and looking at the whole forest. We are simply stuck in the trees oftentimes making short-sighted decisions.
Freedom Versus Flexibility
Part of having an entrepreneurial mindset is being able to understand the difference between freedom and flexibility. The definition of “freedom” is generally misunderstood by those who are not entrepreneurs. The two questions commonly asked of entrepreneurs are: “Didn’t you start a small business to be free?” or “Isn’t it liberating to be an entrepreneur?”
I’ve asked thousands of students in my classes if they feel “free” as entrepreneurs, and they laugh as they glance around the room nervously. Then, I often hear these entrepreneurs state that they have “flexibility,” not freedom. “We have the choice to work any 12 hours a day we want!” That is flexibility. It can be our greatest strength if we can embrace it, use our agility and ability to make quick decisions, and cultivate better financial habits.
I LOVE the entrepreneurial mindset, but many small-business owners need a little “tuning up” or “tweaking” that will give them
the business owner’s guide to FINANCIAL FREEDOM $ 5 chapter 1 $ The Entrepreneur Mindset
much-needed power, strength, and wisdom to better succeed as entrepreneurs. The bottom line: You have the flexibility and power to make changes in how you approach and run your business!
A Better Entrepreneurial Mindset
As we consider the good and bad personality traits of entrepreneurs, we can change our mindset if we just tap into the control we have over our business and the flexibility to make decisions. We can eliminate the incorrect belief systems that haunt us and create more financial freedom in our business and personal lives. Below are three beliefs, or habits, that I encourage small-business owners to cultivate that will actually set them free financially.
1. Don’t depend 100 percent on your business for your retirement income. It’s important to step back and look at the big picture and the future on a regular basis. We need to realize that our industry, product, or service could disappear or dramatically decrease in sales overnight, or face increases in cost or competition through no fault of our own. Plan for such a possibility by diversifying your sources of income or opportunities.
2. Remember the significance of cash flow. They say, “Cash is King” and “Cash Flow is Queen,” yet cash flow will almost always be sporadic or inconsistent in small business. That’s OK. Don’t bemoan this reality, complain, or be depressed. Instead, you should embrace it and plan accordingly. When you do have positive cash flow, you have to deploy it into other revenue-generating strategies, whether in the actual business or outside it. This is where real estate, retirement accounts (properly invested), building buckets of cash-flow-producing assets, and other small-business development options come into play.
3. Know the true value of your business. Your business has value, so you should never give up on making it more and more valuable. However, you need to understand that your business may not be as valuable as you think. Don’t forget, your passion may blur
6 $ the business owner’s guide to FINANCIAL FREEDOM part I $ Perspective
your judgment. You should know the value of your business (from an outside source) and start putting together a long-term exit strategy for your business early on. This means having a living, breathing strategic plan and being able to look at your business from a third party’s point of view.
Tip for financial freedom
Change how you view your business.
As you embrace this entrepreneurial mindset, you will find financial freedom, independence, and flexibility. Independence to work when you want, flexibility to choose what you love to do, and having multiple buckets (or sources) to help you save for retirement will let you choose when to retire. This new mindset works, reduces your stress, and puts you in control of your business!
$ $ $
Takeaway 1—Your business, while it may provide you with freedom or choice to pursue what you love, may not provide you with all the financial freedom you want and need.
Takeaway 2—We as entrepreneurs need to recognize our good and bad personality traits that we inherit with business ownership. As we do so, we will be better able to enhance our good characteristics and address our bad belief systems and habits.
Takeaway 3—You can create a new mindset. This will include a realistic expectation as to the value of your business and what type of retirement it may be able to provide. You can also start to approach your cash flow with a different perspective and start to use your profits to build other sources of income and assets that will truly help you experience financial freedom!
the business owner’s guide to FINANCIAL FREEDOM $ 7 chapter 1 $ The Entrepreneur Mindset
TAKE CONTROL OF YOUR financial future
Tailored for small business owners and entrepreneurs like yourself who are looking for longterm financial planning and wealth management, The Business Owner’s Guide to Financial Freedom reveals the secrets behind successfully investing in your business while bypassing Wall Street influenced financial planners.
Attorney and CPA Mark J. Kohler and expert financial planner Randall A. Luebke deliver a guide catered to your entrepreneurial journey as they teach you how to create assets that provide income so work is no longer a requirement, identify money and tax-saving strategies, and address business succession plans to help you transition into the investment phase of business ownership.
“Mark Kohler’s knowledge and expert opinion can save or make you thousands, if not tens of thousands, of dollars each and every year. This book is a must read for anyone who is serious about achieving or maintaining financial independence.”
BOB SNYDER • CEO, RENATUS
“Ever since What Your CPA Isn’t Telling You, I have been following Mark’s work. I have saved my clients thousands of dollars by implementing his recommended strategies.”
ANGIE TONEY, CPA • ANGEL FINANCIAL SERVICES LLC
“I have known Mark for over 15 years, and his legal and tax wisdom has truly changed not only my life but also the lives of those I coach and speak with at events on-stage. This is a must read!”
“Do you have a coordinated tax, legal, and financial plan? If not, you should read The Business Owner’s Guide to Financial Freedom. Your professional and personal life is about to get a whole lot better.”
CHRISTIAN
MARK J. KOHLER • CPA and Attorney, is the author of What Your CPA Isn’t Telling You and The Tax and Legal Playbook. As a personal and small business tax and legal expert, he helps clients build and protect wealth with wealth transformation strategies and tax and legal remedies often overlooked in this challenging, ever-changing economic climate.
RANDALL A. LUEBKE • RFC, Investment Advisor Representative, RMA, CWPP, CMP, is the founder of Lifetime Paradigm, a firm that specializes in providing real estate integrated and self-directed retirement planning, asset protection, and estate and tax planning to businesses, homeowners, and real estate investors.
ISBN-13: 978-1-59918-616-0
ISBN-10: 1-59918-616-0
$19.95 US Personal Finance / Wealth Management
Cover design by Andrew Welyczko
entrepreneurpress.com
DAN ZITOFSKY • OWNER, ZITOFSKY CAPITAL MANAGEMENT
HESTER, M.D. • LITTLE ROCK EYE CLINIC