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A Little You Time... Personal Finance Considerations for Independent Operators

Most certainly, this website and RS&G magazine are focused on the proper financial management of your business. And, of course, the better your restaurant is managed, the more likely you will enjoy more prosperity in your personal life.

That said, you are an entrepreneur and not someone who can count on a steady paycheck each month.

In this article, we look at ways operators mismanage their personal finances – which only adds stress to a challenging business and lifestyle – as well as some tactics that could help them enjoy the fruit of their labor.

Your Savings Graces

In the best of worlds, the more successful the business is, the more profitable your startup business, the more money flows into your personal bank account. Logically, the reverse is also true, says Baron Christopher Hanson of RedBaron Consulting LLC, a business turnaround, growth, and strategy consulting firm. When business finances are a mess, an operator's personal finances usually aren't much better. Hanson has found low-profit margins of the restaurant industry amplify the connections between personal and business finances.

When the business isn't generating enough revenue to pay the bills, operators tend to take on personal debt. In as little as a couple of bad months, the operator could accumulate debt that will take years to pay off.

Clearly, we can't control every facet of our business. We have slow months and unexpected expenses; however, in this article, advisors offer personal finance recommendations for small business owners to help them ride the ebb and flow.

Among the areas of personal finance that restaurant operators neglect is accumulating personal savings. Noah Schwab, a certified financial planner with Stewardship Concepts Financial Services, LLC, in Spokane, Washington, asks his clients to look at their personal financial management as four buckets. Each bucket represents either living expenses, emergency fund, business growth, or retirement. Once owners have paid their living expenses, the remaining funds should be set aside for personal and business emergencies, investing in the business's growth, and retirement, in that order.

More than most people, entrepreneurs need a source of emergency funding to ride out downturns in business and the economy. Unfortunately, many owners use every spare penny to reinvest in the business and shortchange rainy-day savings. The psychology is easy to understand, particularly for entrepreneurs who tend to be optimistic risk-takers.

During good times, business owners often believe that the money will keep coming in the door, says Michael Foguth, founder of Foguth Financial Group, LLC, in Brighton, Michigan. While optimism is admirable and necessary to success in business, stuff happens.

Foguth recommends automating personal savings as a set-it-and-forget-it strategy. Treat it like your taxes. "If your tax bill increased by 10 percent next year, what would you do? Everyone says, I would pay it. I have to pay it," he says. "It's no different when we talk about savings." In other words, operators should take their personal savings as seriously as they do financial obligations to others. Ten percent is the minimum amount he recommends saving. Those who can afford to save more should.

Emergency savings provides ready access to cash to handle emergencies in operators' personal and professional lives. With a big enough savings account, operators won't have to take on debt or draw from their retirement accounts to fund unexpected expenses, such as auto repair or health needs.

"The money isn't gone, you're just reinvesting it somewhere else," says Foguth. He suggests starting with a specific percentage, such as 10% of income, as a minimum. Such specific goals are a boon to financial planning, as long as you stick to the plan. Promising to save money during the "good months" is often self-deceit. The road to hell is paved with good intentions. It doesn't happen. "Your savings goal needs to be specific," says Foguth. There is time to adjust the goal to more realistic savings later. Or to make bonus deposits to your savings account during particularly good periods.

And on the subject of buckets, there is nothing wrong with traditional bank savings accounts; but they are not the only option. "Cash value life insurance" can be used as a savings strategy and one that Foguth often recommends for business owners, though this article is for general information only. Every business and individual has different circumstances that a financial advisor can address. (See "What Is Cash-value Life Insurance?" below.)

In a perfect world, savings can carry an operator through times when business and personal cash flow is reduced to a trickle. Nevertheless, there are times with short-term financing is necessary. The trick, says Foguth is to "leverage debt in a smart way."

Timing is critical. If your cash flow is seasonal, short-term financing can help you sail through slow periods if you have a plan to repay the loan when sales increase. An important rule of financing is never using long-term financing for short-term needs. If you only need cash to get you through a few months, you do not want to borrow or finance it over a year or more. Business and personal credit cards can be good tools for short-term financing. Shop around for cards that offer good terms and useful rewards programs. And your distributors may be able to offer favorable terms. Having good relationships with your broadline distributor and your banker is vital. Both can provide a vital short-term financing safety net if you have a good credit history.

Retirement

Rightfully, business owners see owning a business as a way to build equity on which they can retire. And many operators have retired comfortably on the sale of their businesses and the business real estate. Some sell their business and retain ownership of the real estate, becoming the new owner's landlord.

But the slings and arrows of outrageous fortune can derail these plans before they are realized. Competition can change the marketplace. Divorce and health issues can require selling earlier than expected. Cashing in on real estate is often a matter of timing that cannot be controlled. In other words, your business and real estate should not be your only assets in retirement. If you are a member of an LLC, contributing to social security is more complex than if you were simply an employee of a business that automatically deducts the 6.2% from your paycheck. You should work with your accountant to ensure you can eventually enjoy social security benefits.

Another source of retirement income for small business owners is a "SIMPLE" IRA, an acronym for "savings incentive match plan for employees" individual retirement account. SIMPLE IRA accounts are most commonly used by small businesses with less than 100 employees. They allow employers and employees alike to set aside money for retirement.

For 2023, the maximum contribution for a SIMPLE IRA is $15,500, or $19,000 for anyone over 50 (the Internal Revenue Service explains more at https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan).

These accounts are popular because they are relatively easy to set up and administer. Contributions are tax-deferred, meaning the funds are not taxed until they are withdrawn. Three important caveats to note with SIMPLE IRAs are:

1. Business owners must also offer SIMPLE accounts to eligible employees. To be eligible, an employee must have earned at least $5,000 in either of the two preceding years and expect to earn at least $5,000 in the preceding years and expect to earn at least $5,000 in the current tax year.

2. You cannot offer a SIMPLE IRA to employees if you offer another type of retirement account, like a 401(k). It must be the only one.

3. The IRS stipulates that employers must match employee contributions up to 3% or make a non-elective contribution of 2% to all eligible employees' accounts.

Roth IRAs are also worth considering. You pay tax on the money you contribute to them; however, the funds are not taxed upon withdrawal. An additional advantage is the ability to withdraw Roth IRA contributions (but not the earnings on the contributions) without penalty at any age. For 2023, Roth IRA limits are $6,500, or $7,000 for those over age 50.

These are only some of the retirement options for small business owners. If you take anything away from this discussion, it should be to hire a professional to guide your business and financial planning. The right financial advisor can help with topics ranging from retirement to taxes to financial goal setting and more. You are well-advised to hire a fiduciary financial advisor. They are obligated to make investment decisions with your best interest in mind. A financial advisor who isn't a fiduciary may recommend products for which they receive a commission or other form of payment.

Early Exits

A skilled business attorney can help you set up your company's limited liability company or corporation with an operating agreement or bylaws that ad- dress how owners can transfer their interests in the event they wish to cash out of the business or, forbid, die. If the restaurant has multiple owners, your attorney will recommend buy/sell provisions in which owners agree to buy out the interests of co-owners in such cases. Multi-owner small businesses will often fund life insurance policies to cover purchases of the interest of an owner who dies. This prevents the interest from passing to the heirs of the deceased owner's estate.

Sole proprietors who own all the interests of their business want to consider a succession plan in the event they die before they have an opportunity to sell the business. This could require sophisticated estate and tax planning; however, such planning could save family members and employees significant grief on top of tragic circumstances.

Sometimes business owners don't plan an exit strategy because they're too busy trying to survive from one day to the next, Foguth says. Operators who are financially underwater may think of selling the business as a solution to their financial troubles. Some operators may simply be ready to retire or want to pass on the business to the younger generation. You might burn out and daydream of a different life, says Hanson. While some of these circumstances seem remote and unpleasant to consider, it comes with the responsibility of owning a business. And you're not alone if you would rather not address them.

"You never know when one of the 5 D's can come up," says Mark Kravietz, founder and Managing Partner of ALINE Wealth, a wealth management firm with locations in New York and Florida. The 5 Ds are death, disability, divorce, distress, and disagreement.

Kravietz sees an exit plan as a roadmap through the 5 Ds. An exit plan can also help operators take advantage of a dynamic market. "There will be times when your business has a very high valuation, and you want to strike when the iron is hot. If you have no plan, then that opportunity could come and go, and you miss it," he explains.

One common mistake made in exit planning is assuming the business valuation is constant. In reality, what a business is worth fluctuates over time. Variables to consider include market, location, concept strength and uniqueness, landscape of competitors, and broader market trends. For example, high interest rates make it a lot more expensive for potential buyers to borrow money, so there may be fewer offers on the table.

Keep Learning…

Kravietz suggests operators give themselves one to two years to plan for a sale and transition the business, whether they're selling to a third party or transitioning to the next generation. A lead period allows business owners to identify the exit strategy, work toward it, and address weaknesses, so the owner enters the transition in a position of strength.

ANOTHER SOURCE OF RETIREMENT INCOME FOR SMALL BUSINESS OWNERS IS A "SIMPLE" IRA, AN ACRONYM FOR "SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES" INDIVIDUAL RETIREMENT ACCOUNT. SIMPLE IRA ACCOUNTS ARE MOST COMMONLY USED BY SMALL BUSINESSES WITH LESS THAN 100 EMPLOYEES. THEY ALLOW EMPLOYERS AND EMPLOYEES ALIKE TO SET ASIDE MONEY FOR RETIREMENT.

There are two general options for selling the business, a public sale or private sale. While a public sale can attract more interest and potential offers, there are downsides to consider. Employees will know the business is for sale and leave. Vendors may stop taking orders, guessing that trouble is in the air. These and other factors make it harder to keep the business going. And you'll want to keep the business going in case the sale process takes longer than expected or falls apart due to circumstances outside your control.

With a private sale, you have the advantage of privacy. The business runs as usual until the deal concludes. "If you have a next generation taking over, you may have discreetly worked for a year to groom someone to take it over and no one else knows," Hanson says.

With both parties doing their due diligence in a business sale, weaknesses are going to come out. Since you can't hide the issues, Hanson says, it's better to get out ahead of trouble. Fix what you can, such as past-due rent, back taxes, or real estate disputes, and disclose the rest.

Hanson recommends operators do a "dry run" before the sale by gathering their attorney, real estate advisor, accountant and business consultants. Have everyone sign a non-disclosure agreement (NDA) and do a dry run of selling the business. These professionals can identify challenges and work with you to clear up any outstanding issues that could derail the exit strategy.

KRAVIETZ SUGGESTS OPERATORS GIVE THEMSELVES ONE TO TWO YEARS TO PLAN FOR A SALE AND TRANSITION THE BUSINESS, WHETHER THEY'RE SELLING TO A THIRD PARTY OR TRANSITIONING TO THE NEXT GENERATION. A LEAD PERIOD ALLOWS BUSINESS OWNERS TO IDENTIFY THE EXIT STRATEGY, WORK TOWARD IT, AND ADDRESS WEAKNESSES, SO THE OWNER ENTERS THE TRANSITION IN A POSITION OF STRENGTH.

"Do everything by the numbers, go slow, be careful," Hanson warns. Above all, he stresses, don't share business financials with anyone without an NDA in place.

Business sales are complicated. Lots of moving parts mean more room for error, and a mistake could cost an owner revenue or even sabotage the deal. For these reasons, Kravietz and Hanson recommend operators work with professionals like business attorneys, financial advisors, certified exit planning advisor (CEPA), and business valuation experts.

For operators thinking about selling their business in the near term, Kravietz says buyers want an owner to paint a strong and compelling picture of business growth. This means showing that a concept is back to pre-covid numbers, with room to grow. "If they can do that, their valuations will rise," he says.

Many restaurant owners are very involved in day-to-day operations. While this is beneficial, it can be a liability when it comes time to exit. When the owner is the face of the business, their presence is an asset. Stepping down negatively affects the business valuation. Having a skilled general manager and assistant management team can show prospective buyers that the business can run smoothly in the owner's absence.

"A lot of business owners don't realize all the little things someone would have to pick up," he says. By documenting processes and procedures, operators can begin the transition. This will not only help the new owner, but helps management do their jobs better."

What Is Cash-value Life Insurance?

Cash value insurance is also called "permanent life insurance" because it provides coverage for the policyholder's life. It often has higher premiums than term life insurance because of its cash surrender value, or "cash value" for short. As soon as you hold the policy for a certain period – usually a few years – you can cash in the policy if needed in an emergency. You can also keep the policy active while withdrawing only a portion of the cash value, using it like a savings account, while enjoying the peace of mind life insurance provides for your loved ones.