No. 12: Adjusting Your Money Mindset as a Professional Services Owner

I’ve met a lot of professional service providers (PSPs) in the course of my career and the one thing they all share is a passion for the work they do and the services they provide. They have no fear of hard work. They love to make a difference. Those who are financially successful as well are fortunate but that is rarely the driving force – to this end, long-tenured PSPs are often called accidental millionaires. So let’s just address the elephant in the room and say it out loud. It is OK to make a lot of money as a passionate PSP and that’s the mindset I want to support and explore in this blog post.

Money is a difficult topic for many non-financial professionals to discuss, but if you want to run a successful, long-term business and transition ownership to a new generation of owners, you have to come to grips with the money. Profitable, growing, valuable and investable  businesses are the goal in the world of succession planning. So how does one turn the corner from being a dedicated service provider and a successful business owner as well? Here are the five key steps I’ve seen over thirty-five years of experience that work for most PSPs.

Step No. 1 – Work on your money mindset: Practice saying out loud, “I will make a lot of money in the work that I do and that is a clear sign of my success. It’s OK to make a lot of money.” Say it often.  Get comfortable with the concept. Money is a positive, not a negative. If you can’t bring yourself to say those two sentences out loud, or you cringe when you do, you will need to spend more time on your money mindset. If money is a negative issue for you, it will be very difficult, if not impossible, to build a valuable, investable, sustainable business to take care of your family, your clients, and your staff.

As a PSP who wants to explore perpetuating a business, you have to be money positive. Statements or thoughts along the lines of “I’m terrible with money,” or “I’m not destined to be wealthy,” or “Rich people are evil!” have no place in the world of a business builder. The idea that one cannot or should not make money doing something they love is a myth. Get these phrases and thoughts out of your mind and vocabulary. Being a revenue generator does not diminish your value as a professional service provider.

Step No. 2 – Get practical about money: Making a good living is about so much more than paying the bills. As a business owner (even more so as a prospective, G2 owner) you have to gradually come to understand the basic concepts of investing, taxes and tax advantages, profitability, compensation structures, estate planning and wealth transfer mechanisms. You don’t have to be an expert – you can hire those professionals – but you do need to pay attention to your experts and learn and listen every chance you get. A good CPA, a bookkeeper, a money manager, an insurance professional and estate planning attorney, all hired separately and over time, will help make you a better business owner and business builder. Being a smart investor is about a lot more than signing a promissory note.

I know from personal experience that there is a wealth of information available today through various mediums such as printed books, podcasts, videos, audiobooks, webinars, speaking events – choose how you wish to learn and devote 20 hours a year to furthering your money education. Over twenty years, that’s ten weeks of devoted learning to these important issues. You will get better and your money mindset will improve as a result.  

As an attorney and a government employee for a couple of years (DDA and securities regulator) I learned firsthand that It is not actually that difficult, once you understand the basics (and stop procrastinating!).  Once you learn the mechanics of how to make your business work for you, you’ll be glad you spent time on it. I often express the wish that “If only I’d started this process sooner!”. But start when you can and don’t put it off.  

Step No. 3 – Set up a tax-conduit entity structure: A properly structured business needs a strong, dynamic foundation to survive and attract and retain next generation talent. An entity can do many things that a sole proprietorship cannot – it is as simple as that.  

Step No. 4 – Diversify and build wealth through multiple steams of tax-efficient income:  By combining several of the key concepts in my book, it is quite possible in a succession plan for a founding or senior owner to earn wages for the work they continue to do (well past any traditional retirement age), plus incoming payments at LTCG rates for the equity they sell, plus interest if they elect to seller finance each Tranche, plus profit distributions for the ownership interest they continue to hold, plus stock appreciation as the business continues to grow on the shoulders of the successor team. Combined with residual equity strategies, the available tax benefits in most city, counties and states of an S-Corporation or an LLC electing to be taxed as an S-Corporation, a single business with two or more owners can create multiple income and wealth building streams with tax efficiencies built in.

Step No. 5 – Think about what happens when you die and take steps to make it easier for your family: For most PSPs, their practice or business represents the single, largest, most valuable asset they own, as well as a monthly income stream and benefits.  Selling a business all at once monetizes the value of the asset(s) at that moment in time, but often discontinues the monthly income and benefits; a succession plan offers both avenues. To be fair, it is actually a continuity plan and the related formal continuity agreement that addresses a PSPs death or disability, though the best continuity partners are usually found on the successor team (G2s and G3s who have made the decision to invest and are equity partners already).

There are lots of things to consider in terms of estate planning, but let’s focus on the big picture items for purposes of this blog. Most PSPs work on and in their business. Businesses live on after you die, or at least they could and should.  An ongoing business isn’t just about the income and value of the assets, it also has obligations to creditors, to staff members, to clients, and a payroll to meet, among many other things. It has assets (a checking account, a money market account, furniture and fixtures, etc.) and liabilities (a lease, a line of credit, etc.) to look after and someone has to step in and write the checks to keep the business functioning. If the business doesn’t continue to function, especially a professional services business, the valuable assets can become worthless in a heartbeat. Don’t leave this living, breathing business to a spouse of personal representative who has never run a professional services business before.

Of course, it doesn’t have to be that way. The answer lies in more than just having a partner or two, though that is one way to work through the challenge of suddenly losing an owner. The better answer lies in having not only more than one partner, but more than one generation of ownership as well. A succession plan depends not only on another partner; it relies on a successor team to step in and step up to keep the business strong and sustainable. No one will be more motivated to keep the business afloat, and even prosperous, than an investor who has committed his or her career to the process along with a monetary obligation.    

The point here is that if you operate as a sole proprietorship, you are the business and it ends with your retirement, death or disability. If you set up an equity-centric business and implement a succession plan (see Lesson No. 3, The Five Attributes of an Equity Centric Business), your business will have the ability to continue on, serving fellow owners, staff members and clients alike, without your spouse having to step in and try to hold it all together. Being an owner of a business is often much more rewarding and certainly more lucrative than being a sole proprietor, especially when it comes to estate planning and taking care of your own family.

Thanks for reading,

David Sr.