Why protecting the value of your business is essential
Hi its Scott from Scott Partners and today we have Daryl La’Brooy, a Business Protection Specialist. In this interview, Daryl discusses that when people get into small business, there’s two major financial issues that they’re looking to solve in small business. One is to get a decent income, to meet their lifestyle, and reach their aspirations. The second thing in small business is to build something of saleable value, and when they exit at some point in time, as we all do out of our businesses, then there is something saleable that they’ve spent possibly a lifetime of effort building up.
SCOTT: Hi, and welcome to the Small Business Heroes show, the show that’s all about and for small business. I’m your host, Scott Trevethan, from Scott Partners and Go Global Bookkeeping, and today it’s my very special privilege to be talking with Daryl La’Brooy, a financial planner, but more than that, a Business Protection Specialist.
Daryl’s been self-employed financial advisor since 2001, and he’s helped clients from all walks of life over the years in relation to their total financial needs. But much, much more than that, Daryl’s got a fantastic history before that working for major banks as an economist and in all manner of roles. He’s been in his own small business from 2001 and he’s started up a couple of those since then, so he certainly has a lot of empathy where we’re coming from.
I’ll get more into exactly what we’re talking with Daryl about and why he’s wearing a bulletproof vest in just a second. Daryl, welcome to the Small Business Heroes show.
DARYL: Thank you, Scott. It’s great to be here this morning.
SCOTT: Cool. Daryl, on your business card, it says that you’re a Business Expert Strategist and a Business Ownership Protection Specialist. What’s that all about?
DARYL: Well Scott, in my experience, when people get into small business, there’s two major financial issues that they’re looking to solve in small business. One is to get a decent income, to meet their lifestyle, and reach their aspirations. The second thing in small business is to build something of saleable value, and when they exit at some point in time, as we all do out of our businesses, then there is something saleable that they’ve spent possibly a lifetime of effort building up.
SCOTT: As accountants, we have so many of our clients going through this life cycle, and they pretty much just work themselves really hard into a job and don’t really come out with much in the way of sale at the end. That’s what you’re trying to prevent.
DARYL: That’s a very good point. In my experience, there are two types of businesses out there. One is a business which is purely an income type business, where there isn’t any saleable value at the end of the day, and then there’s another type of business which provides a decent income, but also has a saleable value.
Your business, if it’s currently purely an income type business without the sale value, you can build up the sale value as well if you go about it a certain way. And of course, that’s vawhere your firm and your team members come in handy to help people build something that might be saleable rather than something that’s purely an income stream.
SCOTT: Absolutely. We’re very passionate about making sure that small business owners, who work incredibly long hours and have sleepless nights and have all the risks that their employed friends don’t have, get something out of working so hard and risking so much at the end of the day. If we don’t see that happen, then that’s obviously poor planning and poor advice as well.
Love that you do that. It’s also about the protection angle, and why are you wearing a bulletproof vest?
DARYL: Very good point, Scott. Here we are in Eastern Malvern, and Eastern Malvern isn’t a dangerous suburb. However, of course, as I mentioned off-camera before we started this morning, I’m trying to create a memorable impression. People might not be aware of what I talked about or what my name was, but if they think about protecting themselves and their business, that’s what we’re really all about. Because a lifetime of effort could be completely wasted if it isn’t set up properly, and if their family and the next generations, if that is what they want to do with their business, aren’t really catered for.
It’s offering a safety net which we find many businesses these days haven’t thought about or haven’t got in place properly, so if the worst happens and there is an unexpected exit, there is a safety net which allows them to realize that value that they’ve spent a lot of time and effort building up.
SCOTT: Daryl’s actually written a book on this subject. It’s called Business Ownership Bulletproofed. I’ve read it; it’s a fantastic read, and I highly recommend it for all of you out there. What sort of things is the book really covering? We’re talking about businesses that need protection; what sort of protection are they needing?
DARYL: Very good point, Scott. In my book I cover four specific areas, because these are the four areas that I’ve actually figured out are the most important from a small business perspective, and that’s been my experience with my small business clients.
The four areas are, 30% of people in business these days are in business with other unrelated people. We find that 9 out of 10 of these people purely operate on a handshake basis, and that’s fantastic – when things are going really, really well and you’re talking to one another. But if things are going poorly, the relationship is actually fraying, a handshake just isn’t good enough anymore. You need a formal exit agreement. It’s a legal document that says that if the relationship is not working out and one party needs to get out of that formal business arrangement, there is an agreed methodology of how that happens and how they get paid out for their equity in the business.
So we find that if there isn’t a formal agreement, then it could cost hundreds of thousands of dollars to exit someone out of the business, particularly via legal court cases and so on, and it’s very expensive. That drains a lot of the income and the value in a business when you’ve got that sort of conflict going on.
The second part of it is, a lot of people look to retire or sell their business at some point and realize some of the value they’ve built up. But in many cases, unfortunately, they never get to the retirement age. Something intervenes; either ill health or unfortunately, sometimes death, which means the value they’ve built up, they can’t realize.
So how do you protect that value? How do you find a ready buyer today for your business as if you were still in the business? In our experience, if someone is out of the business and they’re a key person in the business, the value actually plummets because there isn’t a ready buyer. Because the seller is not there anymore to sell.
Essentially, unless people can put in place things like a sinking fund or they’ve got assets outside the business that they can actually rely on, and all they can do is shut the business and walk away and it doesn’t really matter, doesn’t affect their future – then in our experience, it’s personal risk insurance policies. A lot of people need them; very few people have got them, and we are specialists in ensuring that we can put these in place.
The third part of my book is all about the distribution of the wealth they’ve actually built up. A lot of people spend time creating the assets, preserving the assets, and how do they do that? They buy a business. They’re creating an asset. How do they preserve it? They’re minimizing tax through good advice from Scott Partners, for example. But very few people spend time on the distribution of these assets, particularly once the business becomes worth millions of dollars and there’s a lot to actually protect.
What’s worse, Scott, is we find that people have got a lot of assets tied up in entities. You’ve got them in a self-managed fund, you’ve got them in a trust, you’ve got them potentially in a company or a combination of these three. How does all of that end up with the right people if something ends up going wrong and someone no longer can continue, either because of ill health or worse, through death? We need a great distribution plan in place to ensure that passes on to the right people at the right time. What a great distribution plan does, by the way, is it minimizes costs and it minimizes taxes.
The last part of my book is a Plan B for small business. What I talk about here is we find a lot of people rely on income and the wealth from their business, but they’ve got nothing else outside it. You need a Plan B because what I find is that the lifestyle is held hostage, the fortune’s in the business, and when the business from time to time does turn down, the lifestyle ends up going down with the business.
SCOTT: I can relate to that.
DARYL: Whereas in my humble opinion, I think it’s really good, in good times, to hide away some of that money into a Plan B so that if the business suffers from hard times from time to time, the Plan B kicks in, and you’ve got independent income coming in to support your lifestyle.
SCOTT: Daryl, in your experience, how many small businesses out there would actually be aware of the risks of the assets of the business and aware of the risks that they’re currently being exposed to and are actually actively doing something about it?
DARYL: A lot of successful people, in my opinion, realize they need to do something; however, they’re caught up in the day-to-day of the business, and that tends to take priority over the longer term planning that they need to do. But I find that when I sit down and have a conversation and look at where someone is and then raise some of the issues that haven’t been addressed, people automatically believe that they need to do something. It’s a matter of what they end up doing.
To some extent, it is driven by the financial aspect, so therefore how much of their income do they want to spend on something like this? And of course, we work to the budget. No one has got unlimited amounts of money that they can throw at this thing. But we work within the constraints, and they end up with a much better outcome to protect their income, protect the value of the business, and protect their family than they otherwise might have had by realizing they need to do something but not doing anything about it.
SCOTT: Great point. From my experience talking with our clients and other small businesses out there, it’s often seen as something that’s either too hard or there’s this head-in-the-sand type of attitude that small business owners can tend to have in relation to these sort of matters. Is it really all that hard for them to start looking at this?
DARYL: Not at all, Scott. One of the things we do in our business is we bring the experts on board. A simple 1-hour meeting could work out where they are, where the gaps are, and what they need to address. We do all of that hard work for them, and they end up in a much better position than they otherwise might be in.
For example, the handshake point that I mentioned earlier, where you might have two or three business partners purely working on a handshake and not really catering for the what-if scenarios if something actually happened and someone needed to exit out of the business. We can bring in specialist lawyers that will tailor a great exit agreement for that particular business to protect all the two or three partners from something happening, and therefore minimizing the cost if someone actually had to get out.
SCOTT: Absolutely. Can’t emphasize enough, from both of our experiences, all business relationships with other parties will at some stage end. It’s not a matter of “if”; it will happen, and you absolutely need to have something in place to cover that.
It sounds like maybe the book might be a good place for people to start, but what is the best way for small business owners to contact you or find out a little bit more about what they’re being exposed to and how they can take some positive action to address those things?
DARYL: You’re right, Scott; the book has been written in a manner that is friendly to people in small business and their families. There isn’t any technical information in there, there isn’t any jargon in there. I’m raising a lot of practical, day-to-day issues that people need to get their heads around to protect this thing of value that they’ve actually built up. At the end of every chapter, I raise a number of pertinent questions in very simple language that might prompt people to think about things that they knew they had in the back of their mind, but they hadn’t really brought forward because of all the things that you and I and all our clients deal with on a day-to-day basis.
The best way to get in touch with us is to get on the website, which is www.bops.com.au. On the website is the ability to buy my book that you mentioned earlier. You can buy it on Amazon if you wish, or we can send you the link.
SCOTT: What’s the name of the book again?
DARYL: It’s called Business Ownership Bulletproofed: The 4 Keys to Successfully Protecting Your Business, Family, and Personal Wealth.
SCOTT: Absolutely. Thank you, and we’ll make sure all of those details are listed below the video on our landing page. It’s been a great pleasure having you in today. Sometimes in order to protect your business, you might consider it an unpleasant topic, but it’s not. It’s an exciting thing to know that you’re actually doing what you love doing in your business and know that you’re protected and your family is going to be protected as well.
Thank you so much for coming on today, Daryl. I’m Scott Trevethan from Small Business Heroes, Managing Director of Scott Partners and Go Global Bookkeeping Services. You can find out all the details about our previous interviews on the Small Business Heroes Facebook page, and until next time, see you later.