Sean Manning, CPA and Managing Partner of Manning and Company, is one of the sharpest blades I know when it comes to building a profitable business. He is also a collaborative author of a re-released book Six Steps To Small Business Success: How To Start, Manage and Sell Your Business. In my humble opinion, it’s a must-read for anyone running a business, whether large or small.
Recently, I had the opportunity to glean some great insights from Sean on how to launch, manage and create a legacy business amid today’s tax and regulatory complexities. So read on, and then share your thoughts and comments on this piece.
Sean, why did you and your collaborators decide to write this book?
Michael, this book represents a culmination of nearly 100 years of experience among us, and it reflects the questions we get asked the most by our clients. By imparting the knowledge we’ve acquired from having worked with literally thousands of business owners, our goal was to summarize the key components and details that surface during the life cycle of a business. In a sense, it’s a “how-to” reference guide that’s applicable irrespective of where you are in your business.
So what sorts of issues are you hearing about most frequently from business owners these days?
There are three that I can discern for sure. First, there are the regulations and the expanded requirements that government is demanding of small businesses. That’s been a major concern, not only for emerging businesses but also for those that have existed for a number of years. This increased regulation has brought on quite a lot of angst.
Second, staffing and people-management issues are big. Again, much of this can be tied to increased regulation coupled with efforts on the part of business leaders to determine how to best leverage talent.
Finally, business development is a significant concern. This area has probably gone through one of the biggest transformations in the past 5 years because global economic factors, as well as new tools for communication, allow one to market a business in ways that weren’t possible in the past. The challenge here is in determining how to promote brands and systems digitally to capitalize on these opportunities.
To this point, business planning is an element that was discussed in the book. What advice do you have for business owners who are seeking to develop a gameplan to adapt to these shifts?
There is no doubt that change is happening fast and is having a dramatic impact on business. So if you’re not positioned to leverage change, you typically are falling behind in today’s business world. That’s why business planning is so important, because you have to be dynamic now. Change is good if you commit to accepting and adapting to it by bringing in fresh ideas and leveraging what’s really important. If you and your team are onboard with change, your business can develop quickly.
Shaun, the financial numbers part of a business can bedevil even the best of us. I hear many early-stage small business owners say they need good accounting help but can’t afford it. What advice do you have here?
One of the big reasons we wrote the book is because accounting is often viewed as an ‘expense’. Fortunately, there are ways to turn this into an ‘investment’. It’s important to remember that accounting and financial records give you the proper information to really expand and plan the future of your business. This information allows you to forecast what your business is going to be doing and what it’s needs will be. We believe that accurate financial statements, assessed at least once a month, help business owners understand their own business. The beauty here is that a good accountant can keep you updated with quick and sufficient advice for important financial and tax decisions.
Following up on this point, what should businesses be thinking about in terms of getting past the “money in, money out” mentality, so that they are creating true return-on-investment for their business?
It’s not only important to focus on making a business successful over the short run, but also to leverage those resources or assets for a long-term return. Retirement plan options are an example of this because they allow you to save dollars while preparing for the future. Keep in mind that time is on the side of a business owner. So the goal in running a successful business should be to prepare it for the inevitable transitions it will face over the course of its life cycle, while looking for additional opportunities and asset-building tools like real estate investments that build upon the successful trajectory that’s been created.
Speaking of investments like stocks and mutual funds, what are your views on these?
Frankly, these can sometimes be a distraction in terms of what an owner needs to be focusing on in their business. One of the things I’ve learned, having been in the financial business for a long time, is that business owners should strongly consider hiring professionals to oversee these things for them. Contrary to what you may be hearing in the media and in the press, most business owners will probably tell you that the vast majority of their wealth is amassed through business profits, not through their side investments. That’s why I generally recommend that our business owners stay laser-focused on the plan for their own business.
One of the hot debates these days is independent contractors versus W-2 employees. What should an employer’s stance be on this?
Unfortunately, many business owners have made this a very slippery slope. In the vast majority of situations, those working for a company are probably employees. With an independent contractor situation, the person is working for the company but also has the ability to work for other businesses. But there are a couple of reasons why all of this is becoming more difficult for today’s business owner. For starters, the IRS is obviously conscious of who is an independent contractor and who isn’t. The reason for this is that there are substantial taxes that are paid on behalf of the employer and an employee under a W-2 employment relationship. It’s not that it’s less money if the company designates the person as an independent contractor. Rather, it constitutes a direct versus indirect collection process that the IRS favors.
But isn’t it more favorable for a business to classify those who work for them as independent contractors?
That’s certainly the view of many businesses. But a business owner really needs to be respectful of the situation at hand, given that the IRS is obviously concerned with the tax treatment aspect of this. New legislation like the Affordable Care Act has made this even more challenging because some businesses with over 50 employees have attempted to migrate towards hiring people as independent contractors in order to avoid the issue. In other words, the company might decide to classify five staff members as independent contractors so that they can stay under the 50 employee threshold and avoid the Affordable Care Act requirements. Again, this is a very slippery slope, and it’s in a business’ best interest to be on the right side of the fence.
And if they aren’t?
Well then, the ramifications can be pretty severe. If it becomes a true wage-and-hour issue, then pretty substantial fines will often be assessed. Then there is the potential that a worker mutiny will take place which can lead to a business having to shut down. This is something to be avoided because it is one of the most strictly upheld IRS rules in terms of penalties and interest if, over an extended period of time, egregious mistakes are made by a business. A sitaution like this can be very difficult to recover from.
So what should a company owner be thinking about, if they have aspirations for selling their business in, let’s say, 3-5 years?
My simple advice here is to be sure to plan ahead. Many of the success stories you hear about ensue from a business operating with the vision that their business is ultimately going to be sold. If this is something that you aspire to as a business owner, it is important to get into the mindset of your business being an asset that you can transition in due course.
How does an owner know that their business is ready to sell?
The operative question here is “can the business effectively operate without you, the business owner?” In other words, you should be able to take 2-3 months off and have the business successfully continue to run. If that can be achieved, then you definitely have a saleable business.
I have heard that selling a business can be quite messy at times?
Yes, this is very true, particularly when the ownership partners have been lax in signing agreements from the outset and are conceptually unclear of who owns what. It can be tricky for sure, when its a family business, because there is often a tendency not to document important details.
So what needs to occur in order to prevent these sorts of messy scenarios?
Document, document, document what you’ve agreed to, even if it’s written longhand on a sheet of paper. Then sign it and file it away. It’s also a good practice to take a good look at your business from time to time from the vantage point of an ideal buyer. This may help to expose holes in your thinking that could compromise a potential sale in the future.
In the final chapter of the book, you discuss making the transition to private life after having run a business. Can you briefly tell us what this chapter is about?
Stepping away from a business you’ve put your heart and investment into can be very emotional. You would generally think that this experience is one of excitement and relief but quite frequently, it involves a little bit of dissapointment and a sense of “Oh my God, what did I just do?.” So its critical for business owners to get themselves emotionally ready to sell. Also, be very hopeful for the person buying it. That helps relieve the energy around “Is this something I shouldn’t have done?” Finally, owners should do a financial anaysis before they sell so that they have some idea as to what all of this is going to look like for them financially when they combine their other personal and business assets. Sadly, businesses are often sold prematurely because the owner is just plain tired.
Michael Scott is a writer and blogger on news stories exploring the intersection between free markets and social and economic freedom. He can be reached on Twitter @biz_michael