Jay Boekeloo | 0:00

Being a business owner comes with a lot of responsibilities. Like, yes, you have the freedom if you can build it to have your own schedule, but it also means you don't control that schedule when somebody calls you and you need to take it when you're on a vacation.

Jared Tanimoto | 0:12

You have to be able— If I invest into my business for marketing or buying more equipment or whatever it is, what is my ROI on that? And if you spend $100 and you could get $100 in return, that's gonna far outpace the market that's gonna give you $10 return in that same given year.

Jay Boekeloo | 0:30

It doesn't have to be all or nothing. And I think we have a tendency to fall prey to that where you can be diversified and concentrated, if you will, by taking a portion of it.

Jared Tanimoto | 0:45

It's probably a small chance that your business, having been so successful for such a long time, it'll probably continue to do well, but What we want to do is eventually shift some of that risk because if it doesn't work out, then you could be potentially left with $0 in the bank versus having something built up over time.

Jay Boekeloo | 1:04

Hey, good day everybody, and welcome back to For the Wealth of It podcast. I'm your co-host, Jay Boekeloo, joined with my other co-host, Jared Tanimoto. How are you doing, Jared? Good. Well, hey, today we wanted to talk to people out there who may be business owners or somebody who's wanting to become a business owner, because a lot of times The plan that we hear is, well, I'm going to sell this one day. That's how I'm going to retire. And if you're a person saying that, guess what? You don't have a retirement plan. So today we're talking about why your business is not your retirement plan... yet.

Jared Tanimoto | 1:38

No, I think this is an important one because most business owners that I've spoken to, and a lot of times it's, it's throughout their entire time being a business owner, really don't think about what they're going to do at the end of the business. They, just get into this rhythm of making good money and not, aren't really sure how to treat their business as an asset, as part of an entire portfolio. And so we thought, you know, that would be a good tie-in to kind of how do you look at your business in terms of an asset, in terms of risk perspective and things to be aware of if you're a business owner.

Jay Boekeloo | 2:16

Yeah, and I think that's really neat that we're coming from a perspective of business owners, right? Jared and I both own our businesses And I think that as we talk, there's a lot of times we learn from one another as well, different perspectives. So that's what we're gonna do today is just kind of chat about how we view it. As always, you know, anybody out there listening, if you have something like you that you've heard or read and you're like, I always think about this, please share it with us. 'Cause we are not ones that profess to know everything. By all means, please share. 'Cause we can learn from you as well. So Jared, when we were first talking about how to come up with this episode, we just kind of talked about One of the most common questions that we seem to get from our clients who are business owners and probably even ourselves to say, hmm, is as I'm building this business and I have capital coming in, should I be putting that capital back into the business or should I be putting it into retirement, taking it out of the business? What's your approach there?

Jared Tanimoto | 3:14

Yeah, I wanted to start off by just addressing kind of a common phrase that's used, which is don't put all your eggs in one basket. But it's also contradicted by a lot of other business owners and experts say

Jared Tanimoto | 3:30

diversification preserves wealth, but concentration is what builds wealth. And so it's kind of like, how do you balance it? Because if you are 100% diversified, which I just mentioned is like a really good way to preserve your wealth, and if one egg goes bad, you're not letting your retirement And nest egg crumble. But at the same time, most business owners have accumulated most of their wealth if they do well by being concentrated in their business, meaning that if they take a dollar from their business and they throw it back into their business, it's most likely going to make more money than if you know they had invested it in the stock market. And that's a really hard, I think, just to give a blanket statement and say, hey, this one method is better than the other because every business is different. Every business has different risks. Some people are really good. at running their businesses where, while others, it's like a business kind of just becomes a job. And so I think that's worth noting because there isn't one recommendation across all business owners. I think it's more so understanding the framework and the risk that you have in your business and then making, you know, informed decision on how should I go about treating my business and how should I go about diversifying away if I think, you know, risks are in other aspects of my business.

Jay Boekeloo | 4:54

Yeah, I think that's a good point is that, you know, we can't put everybody into one silo, right? We're— business owners aren't a monolith. Their circumstances are different. How many people are depending on them? It speaks to, I think, what we talked about in a couple of other episodes is really, you need to know, you, you need to be in the data collection or information kind of area first before you make these decisions. And so to your point, I think what I would want to know is actually more on the kind of personal approach with a client, if they were to say, hey, what should I do? One is, okay, why are you doing this? Right? Because sometimes people go into business for maybe the wrong reason, all good intentions, but they're like, I just can't stand where I work anymore. I just wanna be in control. Or, okay, that's great. That's a start. But if you don't like enjoy it, if you, so you're compromising, right? Happiness at that point. Being a business owner comes with a lot of responsibilities. Like, yes, you have the freedom. If you can build it to have your own schedule, but it also means you don't control that schedule when somebody calls you and you need to take it when you're on a vacation. You can set some, you have to be able to set some sort of boundaries. I think that's a whole different conversation, but sometimes there's just a call you have to take. So are you okay with that? Are you doing this for tax purposes? Oh, okay. Well, is there a way to do this in a different way where you don't have to assume the responsibility of being a business owner? My point, there's 100 different ways that we could go, but really saying, what is your why behind this? What are you trying to accomplish? And if everything lines up and it says, yeah, look, you really do like this and you're gonna stick with it and you have kind of like, I want to build this, then we go, okay, this is a place where we can now go. All right. 'Cause there's gonna be some hard times. I also wanna make sure that we're not somebody who takes on a bunch of risk, puts a bunch of capital into this, and then bails the moment it gets hard. Because it will get hard. And what's your support around you? What's the things like that are, I think, conversations. So going back to like the, the crux of the thing though, then they say, well, should I put my capital back into my business or retirement? You mentioned like concentration has led to a lot of wealth, meaning, hey, I'd bet everything on this, putting everything on black, you know, or whatever. I get that. But I think one thing to remember also is It doesn't have to be all or nothing. And I think we have a tendency to fall prey to that where you can be diversified and concentrated, if you will, by taking a portion of it. So, well, what should I do with my capital? Well, I think that it's a great idea to have some of that in the market. And here's why is that when you look at the statistics, of businesses, particularly small businesses, odds are against you right now. You can be the one. I believe in you, and I will always like back up somebody who wants to go into business for themself, but I want them to know the risk and then say, well, okay, let's put what we can into this. But at the same time, there's a market out here, which is a bunch of other businesses that are a bit more established. You're hedging, you're putting some, you're diversifying into those businesses. And so you're a business owner in itself if you own stock, right? So I think also saying, hey, let's own a couple of businesses, a few hundred businesses, but concentrate on yours and let's build it because the potential for that growth is exponential.

Jared Tanimoto | 8:33

Yeah. To add to that, I would kind of look at it from a perspective of, you know, you have your startup, which is, hey, I'm willing to spend X amount of dollars just to get this business off the ground. But at a certain point, if you, You know, you reach that point where it's like, if you've made it 3 years in the business, most likely you've passed that hardest point. And from there you analyze, well, if I invest into my business for marketing or buying more equipment or whatever it is, what is my ROI on that? And, you know, if you spend $100 and you could get $100 in return, that's going to far outpace the market that's going to give you $10 return in that same given year. And so that's one thing to look at is like how much return can you actually get from your business? And then number 2, what kind of business do you have? I believe there's 2 types of businesses. There's ones that, you know, are primarily asset-based, and then there's service-based businesses. So, you know, are you buying real estate? And is it in that way, it's essentially you're almost diversifying in a way because you're continuing to buy more assets that are accumulating the value of your business. But if maybe your business is more service-oriented, maybe you own a personal training practice where you could make tons and tons of money and high income, but essentially it's more of a job that you started for yourself and your income relies on how much time you're actually able to spend one-on-one with clients. Now obviously you could grow that into a larger base business, but for in general, that type of business, the money that comes in, maybe you're putting it back into marketing. So looking at the type of business that you are building and what value does that business actually have at the end of the day if, for example, you wanted to leave and sell that business?

Jay Boekeloo | 10:15

Yeah, that's a really good point to consider because it also lends itself to how are you going to diversify as well, right? Going back to what I was saying is like, hey, I'm not saying don't put most of your money into your business, but one of the things you may do is like, as a business owner, you have the ability to look at like a solo 401 plan. Right? You have the ability to really look at some tax benefits. It's, it's a really cool, I can't remember some, one of my clients said it the other day, so I'm gonna destroy the way he said it, but it was something about the biggest tax loophole is to be a business owner, right? Because it's all legal. And I, I'm not giving any advice to say, hey, go get a, go get a business. There's a lot of opportunity there. But to your point, Jared, is like one of the things is, oh, I'm gonna go into real estate, and then I take off, you know, maybe I go, well, I'm going to take 10% and just put it over into my 401 or something just to diversify. Well, one consideration might be to invest in non-real estate businesses because otherwise you're subjecting yourself to similar risk. Is that okay? If the market goes down, if rates change and the real estate market as a whole goes down and your business is hurt, guess what? So did the other one. So maybe it's a good thing to go over here and be more diversified in Businesses that aren't similar or what we'd say not as correlated to your own business, Yeah.

Jared Tanimoto | 11:40

right? Yeah. And when it comes to businesses in general, a single business has a high exposure to just single event risk. Does a law change that eventually could, that essentially could put your business out of business? Does AI or computers decrease demand in whatever you are providing? Does The real estate market does, you know, tons of different things. Demographic changes, people moving into or away from your geographic area, new competitors to the industry, technology, all those are easy disruptors to a lot of businesses. So asking yourself, what type of business do I have and is it highly susceptible to event risk? And so that would be the primary driver of wanting to diversify. And in the past, I mean, a lot of the business owners that have come to work with me have been successful and When I recommend, hey, let's maybe diversify away, they ask themselves, well, why would I want to do that? Because I earn way more than the market. And I said, yeah, that's true and it's a good point, but it does that until it doesn't. It's probably a small chance that your business, having been so successful for such a long time, it'll probably continue to do well. But what we want to do is eventually shift some of that risk because if it doesn't work out, then, you know, you could be potentially left with $0 in the bank versus having something built up over time.

Jay Boekeloo | 13:04

Right. Yeah, no, really good points. And I think that you were saying, and I won't bore people with this because this is like CFP examination stuff, but like there are like, as a really high level, the 2 types of risk, right? Is like unsystematic and systematic risk. And those being systematic, the system itself, like we can't control as Our business itself. It's like the system, like to your point, laws, the market interest rates.

Jared Tanimoto | 13:32

Yeah.

Jay Boekeloo | 13:32

These are things that are gonna change and we can be subject to them. But then on the other side, the ones that are really dangerous to a solo is these unsystematic risks, which is something like your debt, right? And every business has that. And so that's a, these are what's risky and this is why diversification matters is because Those are things, for instance, what can fall under that is like your books may be being cooked, right? Unlikely, but it's happened. We've seen it. We've seen the Enrons occur. We've seen, I can't think of the Chinese coffee company, but you know, they find out like, hey, within this, not the system, but within the actual micro business at that level, the books were actually just a lie. Okay, well, I don't want to have all my stuff going, well, I trust them because the books look good. We don't know that for sure. So there's a reason to diversify out of it. So, you know, have just a portion of it. So

Jared Tanimoto | 14:30

yeah. And so kind of the takeaway from that is, yeah, which Jay kind of just mentioned is as a business owner, you could, there's tons of different ways to take advantage of tax advantage retirement savings, whether that's a defined benefit plan, a SEP IRA, solo 401, simple IRA, like you have way more options than, you know, traditional W-2 employee has. And so that alone lets you save much, much more in taxes than the average employee does. And so that's where I would start. Use those retirement plans to your advantage and then figure out, hey, as my business grows, how am I going to, you know, distribute a portion that goes back into the business and have that a portion that goes into saving in whether it's just a regular investment account or one of those tax-advantaged retirement accounts. And Jay, Jay, as we were talking earlier, had a really good point. If you don't diversify away and say, for example, you need to sell for, you need cash to, for a life event, you can't just always go and sell a portion of your business to cover these expenses. If you have money stashed aside in other areas, then you could use, I mean, that would be the place to dip into and markets are highly liquid and businesses may or may not always be.

Jay Boekeloo | 15:45

Yeah, that's exactly. So just to restate that liquidity risk, right? I suddenly have something, I need a new car 'cause mine just gives out, right? My car has 235,000 miles on it. Like it's probably gonna give out at some point, right? But if it gives out and I didn't expect it and I don't have an emergency fund or something like that, I put it all in my business. I can't turn around and go, hey, can I just give you a portion of my business so I can buy this car? Like it's not gonna happen, right? Versus if I have something in an emergency fund or even on the market, I can say, hey, I gotta make some sales so I can go generate cash so I can go buy the car. There's reason to do that as well. So if somebody says, well, should I put this money back into my business or should I, uh, take some of it? I think take some of it because it's a protection and some of that can be an emergency fund. Again, one of the things we've talked about before in past episodes is generally I want you to have a year's worth of your expenses. If you're gonna be a business owner anyway, right? So if we're not there, then that's even more reason to take some of that, put it to the side, put some in the market. And then what you can do is figure out what's gonna make your business successful. And I think that's the first thing is what is required of my business that I, how much capital do I need to put back into it? And then you can figure out, you know, all right. How much is it going to affect me if I don't quite do that by taking some, or can I? And then anything left over, I'm taking out. Like, you know what I mean? Again, it's just information. It's cash flow. It's figuring that stuff out. But I wouldn't put all of it back in and go, oh, hey, I overshot. I made more money. Let's put even more back into the business. Not necessarily. One of the things also is, I know we were talking a lot about risk, but I think other people, especially small business owners, You are vastly important when you are a business owner. And I want everybody out there, if you're thinking about going into business for yourself or are in business for yourself, just really, really analyze what happens if something happens to me. I think especially in those early stages, what occurs is that if something happens to you, like the business is dependent On you, and that means that the whole business is gone if something happened to you. Now, if you're setting this up going, well, I'm gonna make this business and I'm gonna sell it, and that's my retirement, I'm taking care of my family, and then something happens, it, that's all upended. So it's a really good way actually to check also of like, do I need some key person insurance? Do I need something to like, if something happens to me temporarily, that my business can go. But also really, really good way also to say, if something were to happen to me, all the concentrated risk is me. How do I diversify that? Well, create systems where you're building the business, right? You're not building— what do I say? You're working on the business, not in the business. So take yourself out and if you can create that, and Jared and I were talking about this just before, your goal is not to make the business bigger. Your goal is to make the business, I mean, that, that's part of it, but that's not the only thing. It's to make it more sellable. Because if I have a giant business that relies on me and something happens to me, it's all gone no matter how big it was. So

Jared Tanimoto | 19:14

Yep. I would also encourage people once their businesses, we made it past the survival stage, immediately, even if you're 20, 30 years out, start thinking about what an exit plan was, because that alone helps shape decisions you make throughout your entire career in your business. So if you have that in mind, you're not making just decisions based on what's in the moment, but decisions based on what's going to potentially affect selling the business, transitioning the business to someone else in the future.

Jay Boekeloo | 19:44

Yeah. And that's something that might You might consider is breaking it down into the 3 phases, right? We're in growth or really like establishing, then growth, and then exit. Just as a simplification, those are your 3 phases of your business. Lay those out because if you're in your establishing your business, right? You're starting it up. You can figure out how much is required. How much money do I need to put back into it? That changes when we go into growth because now we're focusing more on marketing. We're focusing on hiring. We're doing those systems. And then to Jared's point, exit strategy. This is now going, how do I get out of it? The business can, it doesn't have to stay. Maybe you're like, nah, I wanna go ahead and dissolve the thing and just walk away with cash. Do you wanna keep it in there? What's gonna make it most enticing for somebody to buy? So if you're starting, or even if you already started, I would go, hey, right now, good homework for you. Go lay out the 3 phases that you see and what's required. of each of those phases. It's going to change, but as of today, it gives you kind of a guide path to what you're trying to do.

Jay Boekeloo | 20:52

So Jared, any last takeaways that you want to provide listeners before we sign off here?

Jared Tanimoto | 20:57

Think of your business all the time as an asset that could be treated for future benefit, especially retirement. And having that in mind is going to help you frame the volatility risk, the market risk, the economic risk, all of that into decision-making process. So that's my one takeaway.

Jay Boekeloo | 21:18

Awesome. I'll also encourage anybody out there, look for, we're going to do an episode, Jared touched on them, the different types of self-employment plans or employer plans that you can have if you're a business owner. And if that's out now, go look for it. If it's not out yet, it'll be coming out soon. So that you can kind of look through how can I take money, take advantage of some tax benefits there.

Jared Tanimoto | 21:42

Well, thanks, Jay. Good chatting with you today.

Jay Boekeloo | 21:44

You too, Jared. We'll see you next week.

Speaker 1 | 22:01

Nor any of its representatives may give legal or tax advice. Jay Boekeloo is an investment advisor representative offering advisory services through High Note Financial LLC. Jared Tanemoto is an investment advisor representative offering advisory services through Savvy Advisors. Brett Mykowski is an investment advisor representative and registered representative offering advisory services and securities through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker-dealer and registered investment advisor. Cetera is under separate ownership from any other Named entity. THM Wealth Management is located at 102 S. Goliath Saint, Suite 103, Rockwall, TX 75987.