Latest / The Deciding Factor by Edward Jones / How to Protect Your Finances When Launching a Business with Edward Jones’ Zach Gildehaus
Transcript
- speaker-1: If you watch any episode of Shark Tank, you can see why entrepreneurs chase the dream of running their own business. The freedom of being your own boss, there's the potential for a big upside. It's all very appealing. But behind that excitement is a pretty stark reality that about a third of small businesses fail within the first two years. That's why working to protect your personal finances is an essential step when launching a business. To help us understand more, we're joined today by Zach Gildehaus, a strategist in the advice and planning research group at Edward Jones. Zach, welcome to the Deciding Factor. speaker-0: Hey Track, thanks for having me. speaker-1: So, Zach, we've all watched Shark Tank and we've seen the excitement that people have when they pitch their ideas. why are people so drawn to entrepreneurship in the first place? speaker-0: Yeah. So as asked that question, my my mind really goes in in two places. I first, I think there's the societal impact. if you had to guess, what percentage of all businesses are small businesses? I'm not talking market cap or or market share. speaker-1: Yeah. I'm like thinking about my neighborhood right now, you know, and like what are the things around there? And so I would guess seventy percent? speaker-0: Eighty percent? You're close. You're close. Ninety nine point nine percent of all businesses. speaker-1: It's generous to say. speaker-0: That's very true. Direct directionally close and so ninety nine point nine percent of all businesses are small businesses. They employ almost sixty million people in the United States and they contribute about forty five percent of of GDP. So big deal for the American economy. I mean you often hear that small businesses are the backbone of the American economy. Yeah. And then on the individual level, to the to the entrepreneur, what does it mean? You know, I think it's really they're they're wanting freedom. They're they're wanting freedom of time, freedom to pursue something that they're passionate about. You know, and I don't I I believe that business ownership is one of the greatest wealth creation opportunities available to most people. So I really think it's that freedom aspect as well as trying to pursue that wealth creation. speaker-1: Yeah. At the same time, not everyone who wants to be a business owner like feels that they have this great idea in them or has the desire to take that risk for the beginning. It's almost one of the defining features of making this decision is decision making under certainty and thinking about risk. And so, if somebody's dream is that autonomy and they want to leave the nine to five grind, how do they think about that and their options? speaker-0: Yeah, so I I really think there's there's three options. And the first is the one that most people think of. They they jump into the deep end, they leave their employer, their W-2 job, and go full time into entrepreneurship. And that's certainly a way to do it. There's a lot of benefits to it. You you get to build it how you want, you get to pursue your own passion. But there's some some risk with right. The second way is the side hustle. I'm talking about taking your evenings, your weekends to build something that has durable value. And and the benefit of this is it provides you the opportunity to test your idea. Test if you like entrepreneurship. Yeah. Does your product have a market? Can can you sell it? Right. So you can kind of do that part-time. Now the the downside is it might take a little bit longer to grow and scale because you're doing it on the side. And you know, I think you have to know thyself a little bit. Do you have the the resources, the time, the energy to do that on the evenings and weekends? And then the third option, and this is one that I'm really excited about because I think everybody's gonna be talking about it more and more as we go forward. Is buying a business. And a lot of people don't consider that as an entry option. But the average business owner, or I should say, the the majority of business owners are over the age of 55. So we know that over the next 10 to 15 years, we will see a lot of businesses turning over. Yeah. Owners wanting to exit. And that presents a unique opportunity for. individuals who want to get out of that, as you said, the the nine to five grind to enter business ownership. And so I I truly believe there will be people listening it to us talk that will never start a business, but they will own a business. speaker-1: So how might somebody know if they are financially ready to start a business? speaker-0: Yeah. So the way that I would tee this up is is really making sure your financial house is in order. I think a lot of people spend a lot of time, rightfully so, on the business. Yeah. They do their business plan, they think about product market fit, i is there a market for this thing? And they think about can the business survive, but they don't think can our household survive financially? Mm-hmm. And so this is this is a little bit of the basic blocking and tackling of of personal finance, but I would really put it into three things budgeting, debt management. And emergency savings. speaker-1: And this is for your personal stuff before you're even thinking about speaker-0: business. I would yeah, yeah. This because these three things answer the question, how much risk can I assume? Mm-hmm. And what we want to try to do is ensure that you have the capacity to to take on that risk and and really see it through. Mm-hmm. speaker-1: So what are the steps that you can take to protect your finances before you make one of these decisions? You kind of mentioned three pillars here. speaker-0: Maybe. Yeah. So so let's dive into each one of those those three a little bit more. so starting with emergency savings. You know, we generally recommend everybody have three to six months of total expenses and emergency savings. And I say total expenses very intentionally because what some people do is they say, I just want put my essential expenses in there. So they're gonna pay their mortgage and they're gonna, you know, pay make their car payment, but then they don't allocate for going out to to to eat and and yeah, you know, living life a little bit. So we do say total expenses. If you're a business owner. If you look at our framework, you're probably going to go more towards that six month frame. and that'll give you a runway to if the business takes a little longer to get off the ground, you're still able to keep the roof over your head, put food on your table, keep your kids clothed. Yeah. And the reason I bring that up is because emergency savings fund is not cash reserves for the business. That's something separate. We don't want to commingle those. These are really for your personal financial needs. Yeah. Okay. So the second bucket was debt management. And so if you have high interest rate debt, if a substantial portion of your current income is going to debt payment, you may not have a lot of capacity. You may not have a lot of ability to take on additional risk. And be there's a lot of reward in business ownership. Yeah. There's also some risk. So we're trying to clean up that personal balance sheet before we start taking on the the business balance sheet. And the last thing, and this this is, you know, one that's that's not super exciting, but it's budgeting. Yeah. And that is just understanding where your money's going. What flexibility do you have? And so important questions to ask here is, what are my fixed expenses? Can I cut some of those expenses? Do I have dependents that are that are depending on me and my income? Do I have other sources of income, whether it's rental income, a spouse that works? And so really what we're trying to do with all three of these as you start to kind of see the mosaic that we're putting together, yeah, is can we get your personal finances to a place where you can. take on this risk of business ownership and really see it through if if the cash flow is three, four, five years down the road. speaker-1: Yeah. a lot of folks will take out a personal loan or they'll like max out their credit card, like you hear kind of horror stories about this, right? How should entrepreneurs be kind of thinking about debt as they're making these decisions? speaker-0: Yeah, so I I am not a fan of sacrificing your personal goals for the for the business. you know, especially again if it'll depend on your your family situation and that what those goals are. but if if you you you have a family, you have a mortgage and you're wanting to continue paying those things, I wouldn't suggest taking out a second mortgage for the business. Yeah. because now you're you're risking one goal for the other. you know, we hear whether it's 401k loans or entering your 401k. I I don't wanna I don't wanna discourage anybody from following your dreams and sometimes, you gotta find capital where you can find capital, but I really like to think about the goals being separate and not commingling them so that you're not introducing unintended risk into other areas of your life. speaker-1: I think also from a, a behavioral perspective, right? You're you're introducing the risk of resentment, if if you have to feel that you're sacrificing something on the personal side or the family side, whatever, in order to, you know, make this thing work, it puts tremendous pressure on it to work not just the financial piece, but also there's like the relational aspect or the family aspect of this too. speaker-0: Yeah. Yeah. And I think so taking, just to your point there, taking the the family into to account, that's such an important part of of business ownership because now you have this complex asset. It's it's it's a store of value, it's where you get your income. Maybe it's what you want to leave to your son or daughter someday. Yeah. And so it becomes this big family asset that does require a different level of conversation about the business, about money, about legacy with the family. Yeah. speaker-1: So you touched on this earlier, this notion of, the benefits that you might be taking for granted when you're making a decision to start your own thing. I think one of the examples that you gave was, you know, benefits that you might be getting from an employer, like the, you know, the salary that you're drawing. maybe tell me a little bit more about that and things that I should be thinking about if I'm striking off on my own. speaker-0: Yeah, this is a this is a common mistake that we see. People, people I've had friends that do this. They think I need to replace my my income. When if you're if you're working for a employer with a W2 job, it's usually an entire compensation package. And so some of the ones there's there's a there's a big aspect of protection in here as well. So life insurance, health insurance, disability insurance. Those are ones that I would really want to address basically day one, whenever I start the business. Because, you know, if if if something, I haven't forgotten what to happen to if you get sick, get hit by the proverbial ice cream truck crossing the street. What happens to your family? What happens to the business? And so those are things that you really want to take into consideration that will no longer be there. There are there are options out there. You just have to, you know, kind of figure out which direction you want to go. The other two that are that are important, but maybe can be delayed a little bit longer are retirement matching contributions. A lot of employers have a match and paid time off. And and look, if you're starting a business and you're hustling. Maybe those two things aren't as important to you for the first couple of years until you are able to have more cash flow. Yeah. But at some point you probably want to start thinking about what does a workplace retirement plan look like for my business. it provides me the opportunity to diversify my wealth outside of the business. It gives me some some tax potential tax benefits. and then pay time off. I mean, that should be self-evident for all of us, right? We need that time to re-recharge. speaker-1: I'm curious what are some of the things that you've seen that differentiate those businesses that are successful and building value in the long term versus those that falter early on? speaker-0: When a entrepreneur starts out and they start a business, they're the business, the business is them. And that's normal and that's natural. It's necessary as they're as they're building. But at some point, the business can't scale beyond the owner. Yeah. If you take time off, the business doesn't operate. Yeah. If you're sales, if you're marketing, if you're production, if you're accounting, HR, once you are separated from that business. Yeah, it it it doesn't continue to operate. And so you have to start thinking about what are the systems and processes I can put in place so that I can hire good people and they can continue to operate parts of this business that will operate without me, but also scale beyond me. Yeah. How do I develop leaders then to to oversee that? And that's really when you start to build a durable business that has transferable bo value. So over time, really focusing on what are those systems, the processes that I can put in place. And I know it sounds silly. To be talking about, hey, you're I'm thinking about starting a business. I should be thinking about how I scale it, how I exit it, how I sell it, But I've seen it time and again, the decisions that an owner makes in year one affects the options that they have in year 20. And so thinking about how you build the business, how you scale the business from the beginning can provide a lot more options. And that's really what all of this is about is preserving optionality as you grow the business. speaker-1: Zach, this has been a great conversation. And I'm curious what final words of wisdom might you leave our listeners with? speaker-0: And so I'd probably end where we started. I believe that business ownership is one of the greatest wealth generation opportunities really available to anyone listening out there. If you're thinking about it, please, please give it a consideration. But having your personal house in order, personal financial house in order is very important to give you the resiliency and the flexibility to see it from idea to successful business. I love it. speaker-1: Zach, thank you so much for joining us. speaker-0: Yeah, thanks for having me. It's been great.