The main reason people go into business for themselves is quite simple – to have more control. For others, wealth creation is the main focus, although small business also brings with it a higher chance of failure and loss. Are the hard work and extra risk worth it?
If you are a small business owner or have dreams of becoming one, consider the following and how it might apply to you.
Earn less now to create future wealth
Every small business owner knows there’s no such thing as a 37.5-hour working week! The boss generally works more hours than employed counterparts of similar age. However, despite these longer hours and more responsibility, small business owners generally have lower levels of income.
Although they earn less, the net worth of small business owners is based on the value of their business and, on average, they have a higher net worth than employed people of a similar age and gender. However, their super balances are generally much lower than their employed counterparts. The reason for this is simple – given the choice, many small business owners prefer to use surplus funds to grow their business with the expectation that its eventual sale will fund retirement.
Protecting their investment
It’s common for small business owners to use their home as security for business borrowings. This is a requirement of many lenders that want to ensure the owner has a vested interest in the success of the business. For this reason, managing the associated risk is imperative. Life insurance can be used to protect the income, home and other personal assets in case the business owner dies or is unable to work to meet loan commitments.
Another area that is often overlooked by small business owners is the need for key person insurance and business overheads insurance. These policies are designed to protect the business rather than the personal position of the owner. If the business can continue to meet its obligations, the corresponding personal risk to the owner is reduced.
When it comes time to sell
With fewer than one in three business owners having a succession plan, most of these entrepreneurs don’t plan well for the future and with almost 1.4 million Australian small businesses having no employees, the owner IS the business. This limits the value of the business as a saleable asset, meaning that when the time comes, many owners will struggle to extract the value of the equity they’ve built up in the business.
For owners who do sell their business, the correct use of the small business capital gains tax (CGT) concessions, for example, can significantly reduce potential tax liability.
Don’t do it alone
A key characteristic of the small business owner is their ability to rely on themselves, however, there is a time for specialist advice. Financial advisers have the knowledge and skills to help with matters such as business structuring, ownership strategies for personal assets, and the correct insurance cover.
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General Advice Disclaimer
This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.
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