Budget Like A Boss
Whether you're looking to pay off debt, save for a major purchase, or plan for retirement, Bill's expert advice will provide you with the tools and knowledge you need to make informed financial decisions. His insights are designed to help you navigate the ever-changing landscape of personal finance with confidence and achieve long-term financial security.
Welcome back to advice from a CEO. I've been a CEO of a company that did midnight figures as their annual revenue of hundreds and hundreds of employees.
Finance. Let's talk about it. As an owner of multiple businesses, I always made sure to participate in the 401k, max it out and save money. And so I'm part of a couple of organizations that have a bunch of CEOs. And though you'll always hear a comment along the lines of, well, all of my net worth is tied up in the business. Like, if I honestly had a dollar every time I've heard that, all my net worth is tied up in the business. I don't believe in that.
You know, ask all the employees at Enron, and if you don't know what Enron is, go look it up. I would never, ever do that. You're one black swan event from being ruined. So, I haven't been perfect at this, but I would highly, highly, highly, highly recommend if you're an equity holder in a business, save as much as you can. And I always consider that my safe money, meaning that if it's in a 401k, last time I looked, I don't know if this is old information, so you're going to have to fact check this. The last time I looked, under the bankruptcy code, if you file bankruptcy, you get to keep the first million dollars in your 401k.
That's one brief example. So, you know, typically, if you're a smaller-sized business, you're going to have personal guarantees out there. I've had personal guarantees for the business's rent, cars, for sure any traditional lines of credit from a bank. I'm trying to think what else I personally guaranteed. But it's pretty normal that everybody will ask for it. And so what that means of course is that if the business goes under, it's pretty much going to take you down. And that's why they want your personal guarantee. And so because of that, I've always, always made sure that I understood what one, what can I keep, assuming it went really, really, really bad. So I can't recommend it enough, an IRA, a Roth IRA, 401K, save.
As a business owner, I've been a business owner for the past 15 years. I always had cash for an emergency fund. I’ve gone through plenty of times in the business, I don't know, 15 years, probably has happened four or five times where I was unable to take a paycheck. And I did that because I didn't want to fire anybody. I didn't want to cut my payroll costs. I thought it was a temporary blimp so I kept the expense structure in place and I just didn't take a paycheck. And so because I had an emergency fund I don't I seriously doubt anybody knew other than the accounting staff at the company.
Insurance policies depending on what your partnership is like, your capital, or who are all the equity holders, I would highly recommend getting a term life insurance, specifically a key man or a key woman. The reason for that is in the event that you were to pass away, so if you have two partners that own a business, let's say they have EBITDA of 5 million bucks. So you have two partners each own 50-50. The business is spinning off 5 million. If you're unfamiliar with the term EBITDA, it's earnings before interest taxes, depreciation, and amortization. So at a 5 million dollar EBITDA, typically that would trade at five times, so you got a business worth 25 million. So out of the 25 million each of you have a value of 12 and a half million. If one of you dies 12 and a half million dollars to leverage onto the business because you have to go get a loan, maybe the estate of the individual that passed away is going to do a seller note. 12 and a half million, I mean jeez, you put that out over, you know, you're going to have a minimum interest rate that the IRS puts out every year. So let's say it's 5%. I'm making a lot of this math up, even though I know I'm directionally accurate, but at 5%, 12 million over 15 years, I don't know, you're probably going to be at like one, two, one, three, one, four, somewhere in there annually, that you're gonna have to come up with the business.
I mean, that is not easy to do, one, because it's unexpected. Two, you're really taking away the cash from the business and being able to invest it back and then grow. Because that's the key, right? The key is to stay in business. So if you own a business with more than one partner, I would highly recommend getting term life insurance to protect yourself. This is the surviving equity holder in the event that something were to happen so you can have the business continue without taking such a huge hit.