Entrepreneur Finances: Strategic Growth and Financial Planning for Entrepreneur Davis
Current State of Finances
Mr. Joe Davis is a single entrepreneur in his early 40s, whose tech startup has recently begun to take off. Despite the business’s rapid growth and expansion, managing the inconsistent income has been challenging. On average, he takes a salary from the business of $100,000 along with distributions of ~$350,000 annually, but these distributions fluctuate significantly month-to-month and year-to-year.
He has one child, aged 10, for whom he wishes to save for college, aiming for a fund of $150,000 by the time they reach 18. Currently, he has set aside $30,000 in a college savings plan. Mr. Davis owns a home with a mortgage of $400,000 remaining and has personal savings of $1,700,000 (not including business equity and mostly in cash).
As his business grows, Mr. Davis is also considering potential exit strategies for the future, whether that’s selling the business, finding a partner, or moving to a less stressful role within the company and letting an employee take the reins. Additionally, he’s aware of the need to save for retirement, particularly in tax-deferred accounts, but hasn’t yet established a clear plan and doesn’t have the time to research which accounts would be best and how to allocate them.
Financial Advisor Insights: What are we thinking about?
Flexibility
Joe’s situation requires a flexible but robust financial strategy. We need to smooth out his income fluctuations by working backwards from his financial goals and coming up with a goal monthly income to accomplish his goals. Once that is established then his personal budgeting and saving should become more predictable and we can consider how different exit strategies would affect his plans.
Savings
For college savings, investing in a 529 plan could provide tax advantages and potentially grow his existing savings more efficiently. Regarding retirement, as a business owner, Mr. Davis has several options like SEP IRAs, Solo 401(k)s, and a pension that all offer higher contribution limits and tax benefits. Despite the plan options, he is still in a high risk financial situation so keeping a large chunk of his savings liquid and accessible before 59 1/2 would likely be a focus.
Business Sale
We need to evaluate the value of his business, understand the market, and plan for various scenarios so that Joe knows if any exit strategy really could work or is there a number he needs to hit with a sale for him to be able to reach his financial goals.
What’s Next?
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