This week I have a quick PSA for you to make sure you’re not shooting yourself in the foot with your tax strategy. This is going to be a super quick post, but I hope that you’ll take it to heart.
As you all know, I’ve served literally thousands of entrepreneurs – and I don’t mean because I have thousands of followers here on YouTube. Between Venture Catalyst Consulting, the volunteer work I’ve done, and the non-profits I’ve managed – I’ve seen a broad spectrum of business owners from a number of different industries and backgrounds. One thing that is incredibly common, seems like the smart thing to do, and then often comes back to bite you in the butt is the vast majority of entrepreneurs’ desire to get their tax bill down to almost nothing.
Now, don’t get me wrong, I hate paying taxes just as much as the next person, but if you’re a business owner you need to take a step back, think about your long-term goals, and then work with your accountant to determine the best tax optimization strategy for you; not the best tax minimization strategy.
A tax minimization strategy is just as it sounds – you will manage your business and your finances in such a way that you’ll pay the smallest dollar amount in taxes as is legally possible each year, focusing just on that year.
The problem is, when you do this as a business owner you’re potentially making your business look less successful than it is. If you plan to work in your business forever, shut it down when you retire, and self-fund the entire time, that may not be a big deal. If you ever want to get a loan, however, or sell your company, you’re making life harder on yourself. Lenders and buyers want to see that you make money, not that you eek by.
What your tax strategy should be each year depends on your business and your goals and you must work with a qualified professional to determine what that should be. However, make sure that you’re not opting for a tax minimization strategy by default when it could end up costing you big a few years from now. I’ve had enough clients get stuck in their businesses for 3, 5, even 10 years beyond when they intended to sell because they’d been utilizing a tax minimization strategy the entire time and found out that that made them unattractive acquisition targets. Don’t let that be you.
I always thought financing sources focused on earnings before taxes, and how that grows as an absolute value and as a percentage of revenue; and market share/growth relative to the competition.
You’re right; which is why a business owner who focuses on a tax minimization strategy shoots him/herself in the foot. A tax minimization strategy seeks to make earnings look as low as possible and so that entrepreneur will have trouble when s/he goes to get a loan. Market share and growth relative to the competition are less important to lenders but much more important to equity investors or outright acquirers.