Skill at decision-making tops the list of the capabilities a business owner needs. Of course, a great many business decisions affect more than just your business. They can have an impact on your personal finances as well. The two sides of your life are distinct yet interdependent, which makes coordination essential for outcomes that benefit both your business and personal livelihoods. Decisions with lopsided consequences are usually the ones you live to regret.
Do you think holistically? Your answers to the following 5 questions may help you find out.
1. Am I jeopardizing my personal liability protection by intermingling funds?
If you pull money out of the business to cover personal expenses, such as your vehicles or vacations, you run the risk of intermingling funds and jeopardizing your personal liability.
“If you pierce the corporate (or LLC) veil by intermingling, it becomes easier for business creditors to discern which assets are personal, attach them, and potentially seize them,” said Michele Collins, JD*, director of advanced sales at MassMutual. “Safeguarding your personal assets requires maintaining a clear separation between your personal finances and the finances of your company.”
2. Am I using my current income as the primary measure of my business’s success?
Some owners believe their business is successful if the salary they pay themselves — or their business income — supports their desired lifestyle, but it can be a big mistake to equate the two. A focus on current income can prevent you from focusing on value and doing what’s necessary to increase the value of the business so it’s worth more when you’re ready to sell it.
3. Have I selected an exit strategy without considering how much future income I need?
Some owners make the big announcement that they’re gifting the business to family members before they’re certain that their personal finances are adequate to support that decision. Your business is likely to be your biggest asset, so before sacrificing the monetary benefits of selling, make sure your personal investments and savings will be sufficient to provide the income you’ll need to live on in retirement without the need for a salary from the business.
4. Do I use separate advisors for my personal and business affairs?
Working with the same team of advisors – accountant, attorneys, financial professionals – for both your personal and business affairs helps promote holistic thinking, integrated decision-making, and may prevent the silo effect. Also, make sure that someone on your team acts as the “quarterback”—one who brings the best thinking of all the advisors together to help ensure there’s coordination and communication with your best interests in mind. (Related: A strong team: At the intersection of strategy & tactics)
5. Do I coordinate the scheduling of my business and personal decisions?
You may decide that you want to retire immediately, but if you haven’t given yourself sufficient time to carefully plan your exit, the financial consequences are likely to be negative for you and your business. It can take years to transform an illiquid asset like a business into a liquid asset. Work may need to be done to prepare your business to successfully transfer and that could take five to seven years, But if your retirement time horizon is in one or two years, you may not maximize your value, adequately prepare your successor, or worse, not be able to ever truly exit.
A spur-of-the-moment personal decision to leave behind the world of work may seem like a great idea, but it’s likely to wreak havoc on the value of your business, and therefore, on your future income and quality of life.
There’s no getting around it: The personal and business sides of your life are intertwined. When faced with an important decision, remember to proceed cautiously, think holistically, and look carefully at the consequences for both sides of your life.
MassMutual’s team of experienced professionals have the knowledge and the tools to help you achieve business goals as well as personal financial objectives. Talk to us today and learn how we can help.
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This article was originally published in March 2021. It has been updated.