Just being an entrepreneur probably puts you on the wrong side of a basic investing rule: Don't fall in love with your stocks, because they're certainly not in love with you. Your company represents by far the biggest portion of your net worth, but it's also the hardest part to be objective about.
The more you rely on your company to secure your financial future, the more important it is that you be right about its value and salability. The stakes are high for someone like 33-year-old Tao Miller, owner of a Honolulu-based company called Body & Soul Cosmetics. Married with no children, Miller has few assets outside his company: a home and some money in a savings account. Mostly, he's plowed the profits from two previous business successes straight into the three-year-old, cash-hungry Body & Soul. So far, so good: Miller expects to sell $3.1 million worth of art-deco-packaged lipstick and mascara this year. Several large companies have approached him about selling. But he reckons it isn't time -- yet. "I see my future in selling the company and cashing out," says Miller. "But by growing the business to the $5-million to $10-million range, with a nice profitability, I can get a much better price."
Miller's big bet may or may not pay off as he envisions -- but his youth makes the risk bearable, and he does have some outside confirmation of his company's value. The point here is that you can't plan well without taking a realistic look at your business as a financial asset. "Look at your company as if you were going to sell it -- even if you don't intend to," advises Robert Hockett of Cambridge Southern Financial Advisors, in Atlanta. Miller was fortunate to receive a call from a potential buyer. But don't just wait for your phone to ring; bring in a business broker and find out how an acquirer would judge your company's growth prospects, competitive vulnerability, and balance sheet. You should also think about making arrangements now (such as instituting an employee stock ownership plan) that could help you transfer ownership and gain liquidity later, should the need arise.
Problem: You're a late starter, aren't you?
What to do: Get started. Agree with your spouse on a plan. Make automatic savings deposits.
Surprising side effect: You'll gain an unexpected perspective on your decisions as CEO by building wealth outside your company.
It's not hard to see why you didn't start saving early. You spent years sinking every nickel you could find into your business. Your company is profitable now, but there's so much more you want to do -- buy another truck or upgrade your computers or hire another salesperson -- that channeling money into a retirement account just doesn't feel as urgent. "All the business books tell you to pay yourself first, but it's hard," says adman Maddock. "There is always something more important when you're running a business."
A tendency to shortchange yourself may seem all the more reasonable if you share the fundamental optimism about money so common among entrepreneurs. Whole books have been written about money's deeper meanings. The Seven Stages of Money Maturity, by George Kinder, comes in handy here. Kinder holds that many entrepreneurs are strongly grounded in the first stage of his framework, which he calls, simply, innocence. "Entrepreneurs have plenty of animal spirits and vision," he points out. "But they may be weak on knowledge, especially when they're young."
Mike Maddock has a pretty good idea of what that means. Now 37, he recounts two incidents in his life that taught him he might be a little overoptimistic about money. The first came back in high school. He worked three jobs during the summer before his senior year and earned $12,000. He also managed to spend most of it -- on a motorcycle and a stereo system, among other things. "My father came to me, very sad, and said he felt he'd failed me because I didn't realize I was supposed to contribute a lot of the money to college," Maddock recalls. "But my attitude was, 'Hey, I'll make more."
The second incident came in 1991, the year Maddock cofounded Maddock Douglas and got married. Shortly before the wedding he told his fiancÉe, Ruth, that he'd started the company on credit cards and was carrying some $12,000 in card debt. To Maddock's great surprise, she began to cry. His own feelings, meanwhile, were similar to the ones he'd had in high school. "I thought, 'What's the problem? I'll pay it back," he says.
Pay it back he soon did. But a message had gotten through to Maddock. So when his company turned a small profit in its first year, he and his partner immediately began saving. "I bought an annuity," says Maddock with a laugh. "The most ignorant investment ever." Since then the agency has prospered, and Maddock has redirected his savings into no-load mutual funds that he selects himself and the 401(k) plan the company set up. The most important thing for him is that the savings are automatic. "Every month I put a percentage of my salary in there where my optimism can't get at it," he says.
The lesson? Be like Mike. Talk to your spouse about what's important. Then start saving. Maybe only a little at first, but make it automatic -- you won't miss it, you'll like the way it builds, and you may even find that accumulating some wealth outside your company gives you some additional perspective on the decisions you make as CEO. By the way, that well-designed 401(k) plan you instituted can also help you attract the talent you need.
Problem: You're tempted to invest in your own industry, which you know a lot about.
What to do: Avoid your industry. Diversify.
Surprising side effect: When your industry is down, you'll have a clearer head.
Were investing entrepreneurs among the biggest losers in the tech-market meltdown that began in 2000? That's hard to prove -- but easy to believe. Financial planner Marcee Yager, a principal at Sterling Wood Financial, in San Jose, Calif., was right in the thick of things, with plenty of tech entrepreneurs as clients. "There was a period when people didn't want to discuss anything but technology," she says. "We'd have long discussions about risk, but they didn't have as much effect as we would have liked."
