Too often someone will be told, “Wow, you’re a great cook. You should open a restaurant.” If these compliments actually lead someone to take the leap and actually open a restaurant business, the sad reality is that most of the time their new restaurant will fail. Chances are that their failure will have little to do with their ability to cook, and more to do with their ability to run the business.
Understanding and adhering to this concept is crucial when attorneys venture out on their own and start their own firm. The same mantra holds true: just because you’re a great attorney, it doesn’t mean you can run a successful business. Whether you hang your own shingle or you’re a part of a small firm, you must remember that you’re a Business Owner FIRST, and an Attorney SECOND.
Running a successful business can seem a lot like juggling. It’s hard to find the time to focus on any one aspect of the business, and it can be even harder to find affordable and effective ways to protect, grow and sustain your business. “It’s on the list, but so are a hundred other things,” is not an excuse you would accept from an associate, so why do you give it to yourself?
Just a small caveat before we move on: as with any major business decision, please consult your financial and/or tax advisor before making any moves. Most of these best practices could impact your taxes and all impact your financial statements. If you need a better network of trusted business advisors, please contact us – we can provide some recommendations.
With that in mind, here are some best practices to keep in mind as you navigate the journey of entrepreneurship and ultimately, leave your own legacy:
Protecting the Business and Its Owners
Insurance can be your best friend or your worst nightmare. If you have the right types and amounts to cover the major “what if’s” you could be ahead of the game. But all too often, small business owners, including lawyers, have not adequately protected the business in case of hardship. From professional liability insurance to life insurance to disability insurance, no one likes to shop around for these products and the marketplace is full of untrustworthy salespeople. That said, insurance a necessary evil for every small business owner.
Best Practice 1: Professional liability insurance should be a no-brainer. If you aren’t sufficiently covered, you are violating more than just Bar regulations. Just get it done.
Best Practice 2: Life insurance may be an area you already have covered, or so you think. Small business owners who know the value of their contributions make sure they are personally covered as well as have coverage for their partnership should something bad happen. A properly funded buy/sell agreement (i.e., one that is funded by insurance, not the cash flow of the business) is a must have.
Best Practice 3: Disability insurance covers at least a portion of income if you or your partner(s) can’t work. In my opinion, there really is no good argument against protecting the income of major breadwinner(s) in the firm. You can also get coverage that helps pay your overhead.
Again just get it done.
Planning Your Exit
What is your exit strategy? Sadly, some business owners look solely to their business as their retirement plan. That is, build it up and sell it, then live off the proceeds in retirement. While this could happen, there are certainly many risks and possibilities that could cause this strategy to fail. Certainly putting all your retirement “eggs in one basket” is never wise. Again, businesses fail all the time. Creating wealth inside your business isn’t enough – business owners need to create non-correlated assets that can generate retirement income outside their business as well.
Best Practice 4: Sixty percent of small business owners surveyed by American Express say they're not on track to save the money they need for retirement. Seventy-three percent said they're worried about their ability to save for the lifestyle they want in retirement. The adage “the sooner you start, the better off you will be” applies here. Smart business owners choose to pay themselves LESS now while depositing at least 10-15 percent of their earnings into a retirement plan of some kind.
Best Practice 5: The world of retirement planning is complex to say the least. As with many of the topics we’ve covered here, it pays to get sound advice from a trusted professional. Small business owners who know don’t put all their resources solely into their business. They set aside cash for their own retirement, and they are diligent about finding a trusted network of financial advisors that are focused on their client’s businesses, not on their own compensation.
Providing Employee Retirement/Benefits
This is clearly a very hot topic, especially in the past few years. You may think that offering a retirement plan or other employee benefits is outside your budget or even unrelated to leaving a legacy. We submit that providing these types of benefits (as long as they are done in an affordable, value-generating manner) is a cornerstone to building a successful and vibrant practice. Incentivized employees are productive employees and productive employees produce value for the firm. Value is critically important when it comes time to sell, merge or pass the baton.
Best Practice 7: A 2012 Wakefield Research and Capital One ShareBuilder survey of 500 business owners found that 50 percent of small companies with 50 or fewer employees offer some kind of retirement benefit. That means that one out of every two small business owners you network with could be out-smarting you. Small business owners who know the value of great talent set up simple, low cost retirement planning vehicles for their firms and their employees. These can include 401(k)s, SEPs or Simple IRAs and can be easily affordable.
Best Practice 8: Some small business owners would rather allocate their limited employee benefit budget to providing or subsidizing medical coverage. According to 2013 Bureau of Labor Statistics data, companies with 99 or fewer employees spend $1.55 per hour worked on health insurance, more than twice as much as the 60 cents per hour they spend on retirement benefits. With the ever-rising costs of healthcare in the U.S., it’s easy to just say, “I can’t afford it” and move on. But savvy small business owners find a way. You could do something as simple as pay employees an ‘extra’ monthly amount and let them know the idea is they use it to help cover healthcare costs. Better yet, contact a trusted insurance agent and discuss whether there is an affordable plan that could work for you and your business. Perhaps the Small Business Health Options Program Marketplace, or “SHOP” exchange, could also be a resource. You could subsidize a portion of the employee premium for such a plan and/or help employees cover healthcare costs by contributing to an HRA (Health Reimbursement Arrangement) or HSA (Health Savings Account), provided that to use an HSA, the plan you offer must be a high deductible health plan.
The Bottom Line:
Clearly, there are many considerations in owning and operating a successful law firm. The best thing you can do for your clients is to stay in business.You’ve spent a lot of time and money for your professional education and training. As a business owner, you’ve spend a lot of effort running your business. And as an attorney, you have your own intrinsic intellectual property. Protect it. You spend money protecting your things – home, car, etc. Isn’t it wise to not just protect the “golden eggs,” but in fact protect the “goose” that lays them? We all have different ideas about what we want our legacy to look like. What is yours?
Malcolm L. Miller Justin Miller
Insurance and Investment Strategies Founder, JTM Consulting LLC