A good business with a competent operator almost always produces returns well ahead of any other investment, writes Terry McMaster
Businesses are the best investments. Ultimately all wealth derives from businesses.
Every day private businesses change hands for multiples of two, three or even four times’ maintainable profits. That’s the equivalent of a return on investment of between 25 per cent and 50 per cent per annum. There is no better investment.
Yes, some businesses are risky. But risk can be managed. A good business with a competent operator almost always produces returns well ahead of any other investment.
A business client is worth ten employee clients. There is more for you to do, and more that can be done. Business clients need more services than your employee clients: tax, superannuation, estate and succession planning, risk insurances, property, investments, legal structures and business plans all feature in the model SOA for the model business client.
“Services” means “fees” in a post-FoFA world. If you do not provide business advice to your clients someone else will.
How much do you need to know and how do you know it? The good news is business advice is not hard. You already run your own business so you have the basics down already. Most business clients will know their main game, ie the technical skill or product they supply. It’s the non-main game things they need your help with.
Let’s assume next Monday young John comes to see you. John is 26, and has been in the plumbing game for ten years now. He is still with his first boss and he knows he stuff. And he knows lots of people too. He is friendly, personable and reliable. People like John. He has just become a dad for the second time, and his wife Betty is now a full-time mum, flat out 24/7 caring for their young family. What should you say to John?
You should tell John its time he set up his own business and started making profits for himself, not his boss. Ask him who he loves the most, his babies or his boss? John, hang up that shingle and start your own show. You will never regret it.
John takes your advice. He trusts you. And you show him how to do it.
John cuts out the middleman to double his income overnight. He can now make $120,000 a year. He can claim better tax deductions for cars and similar costs. The ATO allows him to form a “mum and dad” partnership with Betty, so he can split his (bigger) income with Betty. That makes for more deductible super contributions, and even more tax savings. John is delighted with you.
John leaves CBUS and sets up his own self-managed fund and invests in direct equities. You do it for him. John needs more income continuance, life and trauma insurance. You do it for him. John needs finance for his new ute, and help buying and funding a (CGT free) factory for his equipment (and caravan and boat). You do it for him.
The business gets better and better. Soon John is off the tools and supervising a team of ten maintenance plumbers and running a very tight and profitable show.
You introduce John to an allied accountant who will not compete with you and respects your role as a primary adviser. The accountant refers you clients in return. You reciprocate, and respect the accountant’s role as the primary adviser to those clients. Your alliance works. You are a team.
As John’s wealth builds he needs your help buying and funding a new home.
John’s estate planning becomes more complex. You take him and Betty through the labyrinth of wills, powers of attorney and SMSF binding death benefit nominations.
You are John’s guide, mentor and trusted advisor. It’s a 30-year relationship, and over that time, John refers his business associates, friends and family to you.
This is a case study in why businesses are the best investments.
