Makeover

It's easier to find an entrepreneur who can build an Inc. 500 company than one whose family's financial future is planned and secure. But that's hardly a surprise, since business owners shouldn't think about their money the way everyone else is told to

So often the impressive company builders we meet have paid precious little attention to their personal finances. Most are justifiably sheepish as they admit that their families' financial futures rank low on their agendas. But while many entrepreneurs like to think that their successful businesses will ensure a comfortable tomorrow, reason forces them to acknowledge that it's wise to make contingency plans.

As a company owner and builder, your financial status is distinctive. Your company probably ties up all your assets and attention right now, but it also represents all your prospects for one day accumulating substantial wealth. Here, Inc. offers a strategic blueprint designed specifically for the needs of entrepreneurs. And to elevate the notion of financial planning beyond the abstract, we invited an expert to dissect and redirect the finances of Mark Moerdler and Galina Datskovsky, an entrepreneurial couple with plenty of questions about how to translate their company's fast growth into the achievement of their family's financial ambitions. Their situation and the advice offered by Stephen Adams, an experienced investment adviser, may help you chart your own course.

The couple: Galina Datskovsky, 29, and Mark Moerdler, 34, started dating when they were computer-science graduate students at New York City's Columbia University. They married in 1985 and founded their company, MDY Advanced Technologies Inc., in 1988. The couple now has a newborn baby, Esther, and a three-year-old daughter, Zahava, and often works 18-hour days, six days a week. Moerdler started his first entrepreneurial venture while still an undergraduate. Datskovsky, who emigrated from Russia with her parents when she was 11 years old, is driven by the memory of "going to the grocery store and not having enough money to buy food."

The company: Having grown to 1992 sales of $3.5 million, MDY Advanced Technologies, in Fair Lawn, N.J., placed 150th in the 1993 Inc. 500. The company is carrying no long-term debt. With 21 full-time and part-time employees, MDY designs complex computer networks and industry-targeted software and provides disaster-recovery computer services. Moerdler projects 1994 sales of $10 million, but Datskovsky, more conservative by nature, thinks $7 million is likelier. Either way, the company is well on the fast track.

The expert: Stephen Adams, age 48, is a managing director at Van Kasper & Co., a San Francisco-based investment-advisory firm owned by its 40 partners, including Adams. The firm's clients and investments are in fast-growing, emerging businesses -- many in high-tech industries. From his vantage point of more than 20 years' experience as a business owner and investment adviser, Adams contends that "people in the investment business should run their own companies so they can appreciate profits and the bottom line."

The status quo: MDY is wholly owned by Datskovsky (51%) and Moerdler (49%). Since its first year, the business has generated strong profits, which the couple reinvests in the company. Because MDY is an S corporation, all net income is considered the owners' taxable income. So even though MDY paid the couple salaries totaling more than $170,000 last year, Moerdler and Datskovsky were obligated to pay income tax on considerably more than that, ending up with a combined take-home income of about $120,000. Still, they hesitate to give themselves raises because MDY's credit line is woefully low.

Aside from income taxes, their biggest personal expenses are a home mortgage ($20,670 yearly, with an 8.25% fixed mortgage and $234,000 outstanding, with 29 years remaining), child care for the kids ($10,400), private-school tuition for their older daughter ($5,000), and their one indulgence, four vacation getaways each year ($15,000).

Datskovsky and Moerdler both carry life-insurance policies worth about $1 million each: Datskovsky, a term-life policy; Moerdler, a term-life policy and a whole-life investment-oriented policy. The policies cost them more than $3,500 a year.

Out of a discretionary income that Moerdler calculates to be around $25,000, the couple has managed to save about $10,000 for future college costs, nearly $15,000 in individual retirement accounts, and for emergencies, a few thousand dollars in a short-term investment account.

The meeting: One frigid week this past January, Adams flew East for a no-holds-barred financial-planning session at MDY's suburban New Jersey headquarters. For nearly five hours the conversation ranged from Moerdler and Datskovsky's personal and business goals to their fantasies about one day going public to their frustrations with the tax system and their bank. They were dissatisfied, they confessed, with their "haphazard" approach to saving and investing, as well as with their inability to find high-quality investment advice.

Adams: Given your ages, I compliment you on what you've managed to accomplish so far. Your insurance coverage is on target. But I think Galina's term coverage is the better choice. You shouldn't confuse insurance with investments. Insurance should exist in a family's portfolio as a way of buying, as cheaply as possible, the protection of income replacement. That's term coverage.

And even though you haven't been systematic about it, you have tried to prepare yourselves for the future. Most entrepreneurs don't have the time to work on personal financial planning and don't like to give up control. So it's hard for them to invest in something that someone else is running.

Moerdler: Our problem is that we're not sure how to plan or even what direction to take. Everyone and his brother try to give us financial advice because they're trying to sell us something.

Datskovsky: Yes, and how do we find a financial adviser we can trust? For short-term investments, our insurance broker recommended a mutual fund. But I'm not comfortable with it.

Adams: I think you need to make your own financial plan and look at it once a year to make sure you're staying on course. Since you're both young, I think you're doing the right thing with your salaries. You should be growing your company -- it has the best reward/risk ratio. And since you are in control of the company, there are choices for you to make that would immediately improve your personal financial situation. For example, as long as your company doesn't have a tax-deferred retirement plan, one money-saving tactic you might want to consider is having just one of you earn your combined salaries and the other work for free. That would save you about $10,000 in FICA taxes.