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Showing posts with label Financial planning. Show all posts
Showing posts with label Financial planning. Show all posts

Friday 4 November 2022

How to protect your sole proprietorship

  

How to protect your sole proprietorship ...

While your business may be thriving under your sole proprietorship, it is important to realise the consequences of having a business ownership tied to you individually, and how it may impact your family in the eventuality of your death. 

THERE are many ways in which middle-income Malaysians make their money; the most common is through a sole proprietorship business, which forms a major part of the business owner’s overall wealth value.

There are many upsides to owning a sole proprietorship – it is fairly easy to set up, the startup costs are low, you have full control over the business as you’re the sole boss and, of course, the main draw is that you keep all the profits you make.

However, a sole proprietorship also has its disadvantages. One of the major disadvantages is that there is no distinction between your private assets and business assets.

As such, there is unlimited liability for debts, which has a potential to eat into your personal wealth should you not take measures to manage your business well.

An aspect commonly overlooked is the need to protect or preserve the business value and continuity should something happen to the owner.

Therefore, while setting up a business may be a positive step to take to help bolster one’s income, there’s also the stark reality every sole proprietor would eventually face – their business will also be terminated should any unforeseen circumstances happen to the owner.

This can be especially daunting for the families of the sole proprietor, who may face immense difficulty in managing their finance and preventing the families’ wealth from being affected after the death.

The case of Leong

Let’s take the example of Leong, a sole proprietor of a successful accounting practice in Puchong with 15 non-professional staff.

Leong’s business was doing so well that even with overhead costs of RM80,000 a month, he could easily draw RM45,000 per month from his practice.

Due to his lucrative business, Leong’s wife stopped working to spend more quality time with their children. One day, Leong met a fatal road accident and passed away. And with his sudden death, came a financial crisis to his family.

Clients who were once close acquaintances of Leong’s practice switched to competitors who offered the same services. Leong’s wife, not a qualified accountant, was unable to pick up her late husband’s business to continue offering these services.

Eventually, the business was forced to wind down as the dwindling income was not able to pay off the company’s overheads.

Since Leong was the sole breadwinner for the family, having no business income meant having no income for the family to survive off. His personal savings was only able to last the family 11 more months without any further influx of income.

As grim as this recollection sounds, it actually happens a lot more often than one might guess.

The question is – how do we avoid such situations for ourselves and our families? What could Leong have done to avoid this financial tragedy befalling his family?

First, let’s see some of the options that are available to Leong’s wife in such a circumstance.

> Liquidation of business by estate administrator.

Unless authorised by the will or court order, the administrator or executor must wind up and liquidate the business as soon as possible. Forced liquidation usually results in severe loss of business value, sometimes ranging as much as 40% to 90%.

> The estate administrator or executor continues the business until it can be sold as going concern.

In this alternative, the sole proprietor’s will gives the power to the administrator or executor to continue the business and exempt him from personal liabilities for the appropriate actions taken during this period.

However, the administrator or executor may still be liable for any losses caused by his or her negligence or imprudence.

Inexperienced administrator

The risk here is that, the administrator or executor may not be experienced or familiar enough to run the business operation.

Secondly, after settling the outstanding estate liabilities, administration expense and taxes, the administrator or executor may not have sufficient working capital to continue the business.

> The heirs inherit the business through a will.

In the sole proprietor’s will, the business can be transferred to the heirs as a gift. However, the heirs may not have sufficient knowledge or ability to run the business profitably.

If they are not successful in running the business, there’s the risk of dissipating their other estate inheritance in order to save the business. As such, the business gift may turn out to be a liability rather than an asset for the heirs.

> Sale of the business through as agreement prior to the death of the sole proprietor.

Before his death, the sole proprietor may offer the sale of his business to his employee or an interested outsider.

Under this alternative, the potential buyer enters into a contractual agreement with the sole proprietor so that the sole proprietor binds his estate to sell and the buyer to buy the business at an agreed price.

Now let’s take a look at some actions that sole proprietors can do while they are living to ensure that their surviving family members are not put into a tough position financially.

> Get a proper business valuation assessment as part of your estate planning.

As sole proprietorship is the trickiest to sell, it is important to have a licensed financial planner to help assess the business value.

He or she would be able to highlight the probable shrinkage in its value under different circumstances, and prevent the sole proprietor from overvaluing their business and thus under preparing the cashflow needed upon death.

Power to executor

> Give the executor of your will the decision-making power to continue or sell the business.

Without this instruction, the executor is bound by law to protect the assets in the estate, and thus may default to winding up the business as soon as possible, which could result in losses.

If the heirs are interested to continue the business, owners of the sole proprietorship may want to instruct the executor to transfer the business to them.

> Seek out a buy-sell agreement with friends or network in the field.

For some professional practices like accountant, doctors, land surveyors, architects, consulting engineers and others, a good practice would be for the sole proprietor to reach out to friends or network in the same field to enter into a buy-sell agreement as an alternative.

Such an agreement will ensure that the surviving professional will purchase over the practices from the deceased’s estate.

An agreement like this would not only help one, but both sole proprietors to ensure the continuity of the business in the event of one of the owner’s demise.

> Identify key employees who can succeed the business.

Depending on the nature of your business, you may want to invest some effort into identifying a potential successor and prepare them to take over the business one day.

Involve any prospective successor in the day-to-day operations to give him or her more experience. You could also consider entering into a buy-sell agreement with the potential successor to buy your business in the event of your death.

> Protect your family with life insurance.

This solution acts as a buffer to provide a safety net to your family. Protecting your family with life insurance while you’re still alive could help bolster losses incurred from a forced wind up of the business.

Forced liquidation

In some cases, the forced liquidation could result in liabilities in excess, of which the life insurance coverage will be able to compensate the business value loss.

In the case that your business does not go through a force winding up, the life insurance claim proceeds will buy your family time to transition through settling your estate, learning the ropes of your business, and/or provide your family accessible working capital during the transition period of settling your estate.

In the case of entering a buy-sell agreement with an interested buyer, he or she can consider purchasing life insurance on the life of the sole proprietor.

This may sound crude and calculated but when the time comes, it can provide additional funds needed for the purchase of the business.

While your business may be thriving under your sole proprietorship, it is important to realise the consequences of having a business ownership tied to you individually, and how it may impact your family in the eventuality of your death.

If you are a sole proprietor, I invite you to evaluate your risks while things are going well with your business. The best way to do this is to employ the expertise of a licensed financial planner.

The licensed financial planner would be able to help identify the pros and cons of each alternative to your business and incorporate your intended wishes into your comprehensive financial planning.

Yap Ming Hui is a licensed financial planner. The views expressed here are the writer’s own. Any reliance you place on the information shared  is therefore strictly at your own risk.

The Star - StarBiz By YAP MING HUI 

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Generating sustainable retirement income 

 

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Saturday 9 January 2021

Generating sustainable retirement income

 


Many Malaysian are EPF contributors and have FDs as well. "You will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses."

ONE of the top financial concerns of retirees is running out of money.

Whether you were an executive earning a reasonable income, or if you are making top dollars as a businessman, the fear is still valid.

For example, Tommy, who left the working world soon after selling his factory to a European multinational corporation. Tommy shared during one of our meetings that he was golfing every week and globe trotting almost every other month.

However, there was a problem that greatly bothered him. He found that he was dipping into his fixed deposit every now and then just to maintain his interesting lifestyle.

“Yap, you will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses, ” he said.Combing through all of his finances, we discovered that Tommy’s lackadaisical attitude was to be blamed. He has not been paying enough attention to invest and generate income from the RM12mil nest egg that he had painstakingly accumulated. His investment portfolio was a mess.

Over the years, he invested in a few properties but never really bothered to oversee them. When tenants left, he didn’t make an effort to secure new tenants. In fact, some properties were even sitting vacant and idle. His excuse? He was too busy running the business.

Yap Ming Hui
Yap Ming HuiYap Ming Hui

Tommy has also invested in some shares and unit trusts but he seldom monitors and reviews their performances. Imagine his surprise when he went looking for some extra cash but discovered that most of the investments were not making money. Prior to meeting me, he couldn’t decide whether to sell or to keep those underperforming investments.

Consequently, the bulk of Tommy’s wealth is in fixed deposit. The trouble is the interest income from fixed deposit barely covers the impact of inflation. As such, if Tommy continues to spend on his interest income, he will risk having the principal depleted.

Asset rich, income poor

Tommy’s problem is a typical case of “Asset Rich, Income Poor.” His situation is definitely not unique. In fact, I find most self-made millionaires or business owners, typically strong at creating wealth from their business or professional career, but poor at generating income and gain from the created wealth.

For one, all the time spent ensuring their businesses succeed also takes them away from making sure that the wealth created is optimised.Let’s examine Tommy’s assets and see how it measures up (see chart).

The RM6mil in fixed deposit generate approximately 2% interest income. However, notice that the 2% of interest is not sufficient to offset the 4% inflation provision. As a result, there is negative net income coming from Tommy’s fixed deposit asset.

Tommy’s properties are worth RM3mil and only generates RM50,000 in rental income per annum. Nevertheless, this can be considered a net income because inflation will be hedged by capital appreciation (at least 4% per annum) of the properties.

The RM1mil in shares gives a total return of 5%. Factoring 4% inflation, the actual income received from share investment is RM10,000.

Unfortunately, the RM2mil unit trust investments didn’t offer any returns. After inflation provision, his unit trust investment has a net income of RM80,000.

The reality is if nothing is done now, Tommy’s wealth will continue to shrink by RM140,000 a year once inflation is factored to the equation. How does this play out for Tommy? The fact that he needs RM360,000 a year to maintain his current lifestyle will not augur well for him.

So, how can you prevent from ending up in Tommy’s situation?

The optimisation measures

> Remember to review the performance of each of your investment asset classes. In order to generate more income and gains, be proactive in getting rid of poor quality and poor performing investments. Look at each investment and ask yourself, should you keep it or should you sell?

> Consider moving fixed deposit into higher return investment.

Any gains from your fixed deposit would probably be eroded by inflation, especially given the current low interest, which will probably persist for quite some time. After calculating and providing for your emergency fund cash reserves, the balance of your fixed deposit should be invested into other investments that can generate higher return and income to hedge against inflation.

> Diversify the source of retirement income

Even if one investment asset can give you a good income and hedge against inflation, it does not mean that you must bet all or the majority of your wealth in it. For example, property investing. Some investors have found success in it. They were able to generate good capital appreciation and rental income.

As a result, they put a majority, if not all, of their wealth into properties. It may sound logical at first but rental income is not sustainable in the long run. It is subjected to changes, some of which cannot be controlled. Therefore, the best practice is still to diversify your retirement income across different asset classes, like share dividends and capital gains, unit trust gains, bond investment gains, retirement income products and others, so that it is not badly affected by any one impact.

The ability to grow your wealth during retirement years is important. Just because you have stopped working, it does not mean your money should stop working too. The idea behind wealth optimisation is to ensure that you can upkeep your retirement lifestyle and protect your wealth from inflation.

Ideally, one should get a plan done a few years prior to retirement to see how your retirement income would play out. After all, you wouldn’t want to have any unpleasant surprise, like in Tommy’s case. When you have time on your side, you can improve your investing skills and adjust your retirement plan accordingly while still in your active income earning years.

Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information https://www.thestar.com.my/business/business-news/2021/01/09/generating-sustainable-retirement-incomeshared is therefore strictly at your own risk.
 

Monday 24 November 2014

Financial planning is all about investing


LOTS of people shy away from financial planning because they think they may be pressured into investing. And when you think investing, what comes to mind are horror stories of people who lost their life savings during the Asian financial crisis and Dot Com Bubble.

We hear tales of greed and chasing the hottest sexiest investment themes that has led them down the path of poverty and for some great debt due to leverage.

Admittedly, in the wealth management business, investments do form a large part of conversations that happen between ourselves and our clients.

For the most part, people speak to financial planners or wealth managers about how to make their money grow faster so they can meet their goals.

How much return can I get? What can I get if I invest in equities? How about properties? How can I start investing in currencies?

When people engage in a conversation about investments, inevitably, we get seduced by the quest to find the highest yielding asset. We steer into instruments we are not familiar with, drawn by the allure of high headline returns.

Think dotcoms. Think gold investments. Think land investments. Think bitcoin. Not necessarily bad investments but the basic concept of risk and diversification fall by the wayside as we chase returns.

But, step back for a moment.

Are you asking the right question? Is financial planning only about finding the next best investment?

While investing will likely play a key role in your financial plan, there are a lot more questions that need to be answered before you can choose the right investment, or if you even need to invest aggressively.

First question, how much do you need? Second question, when will you need it? Third question, how much have you set aside or are prepared to set aside? Last question, what returns are you going to get?

So say, I would like to buy a property in five years, of which I plan to make a downpayment of RM50,000. I have currently set aside RM10,000. I can currently save RM500 monthly.

Let’s assume I have no experience investing and decide to place it in fixed deposit at 3% per annum. Doing my maths, after five years, with interest compounded, all this adds up to only RM43,000. You are RM7,000 short.

In such an example, most people approach an adviser to find out what could yield them higher returns. In the above example, any misadventures in your investments could possibly set you back in your acquisition of your next property.

What if this was your children’s education? You may not want to risk your child entering university two years late. These are things your adviser needs to know as there other alternatives.

Financial management is very much about balancing between these four requirements. While getting higher returns so you can meet your goal is one way, it’s not the only way! You have other options. So, let’s go back to the four questions.

Firstly, you could buy a cheaper property with RM43,000. Alternatively, you could wait another year to purchase that property, giving you more time to save up. Or, you could increase your monthly savings to RM600 at 3% per annum. Lastly, consider investing in something that yields you 7% per annum. So, really, out of four options, only one is about investing.

For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed.

By Ong Shi Jie
For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed, says Ong.

Ong Shi Jie (CJ) is head of wealth management, OCBC Bank (M) Bhd.

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Monday 4 February 2013

How to save when you’re broke?

Saving money is not impossible when you're in financial dire straits

SAVING money can be a tall order for a lot of people but it becomes near impossible when you're broke or financially challenged. Still, it's not a position you can't come out of.

Here are some simple steps to follow to help you save despite being broke.

Set up a budget plan

If you're broke and trying to save money, than it's best to come up with a budget plan, says Standard Financial Planner Sdn Bhd's Jeremy Tan.

“If you're broke, then you need to evaluate what you're doing wrong.

“Have a budget plan. Look at what assets you have? “Perhaps you could try liquidating some.

“But even before you're broke, you should have contingency or emergency funds,” he tells StarBizWeek.

Keep working

MyFP Services Sdn Bhd managing director Robert Foo believes that if a person is broke, it's imperative for one to continue working or seek a new form of employment - as soon as possible.

“If you have a job, then you should continue working.The experience that you already have would be invaluable.

And what happens if you've lost your job or unemployed? All is not lost, says Foo.

“Don't feel hopeless. You've got skills and should be able to have contacts that can help you find a new job.

“If you have a job and you feel it's unstable or that you might lose it, then you should ensure that your resume is with headhunters, to ensure your income position remains as stable as possible.”

Tan also points out that age can be a factor. “Of course if you're young, you'll be able to take on multi-tasking jobs. If you're old, then you might need to go easy on the job load,” he says.

Compare prices

Self-confessed shopaholic PS Tan says that when she's “a little bit behind on her credit card payments” and needs to cut down on her spending, she decides to be a little bit more “choosy” with her shopping.

“When I know I need to cut down on my spending, I go several hypermarts or supermarkets and compare prices first before eventually purchasing.

“Also, if I have been using items that were expensive, I just choose to buy ones that are cheaper.
Be open to new brands and products,” she says.

Eliminate costs

While trying to save, also try to rid yourself of whatever debts you have.

“If you're broke, ask yourself if you have debts or not? Find out how you can restructure them,” says Tan.

Tan meanwhile says now would also be a good time to evaluate and consider eliminating the unnecessary financial obligations that one can do without.

“If you have a gym membership for a gym that you've not been going to for a long time, or perhaps a year's subscription for a book or magazine you've been hardly reading, just cut it off.”

Live within your means

If you're broke, than you're going to need to need to change your lifestyle - immediately!

“If you're broke, then you're not going to be able to sustain the lifestyle you've been living.

“The fastest way to solve this is to cut down on your expenses,” says Foo.

He reiterates that one could find a part time job or even a second one to curb debts quickly.

Eric Lee (not his real name), a marketing executive who was laid off for six months, says he was forced to cut down on his lavish lifestyle when he had difficulty finding a job.

“I had to do a lot of things differently.

“My car got repossessed and I had to move out from where I was staying because I couldn't afford the rent.

“I moved in with my parents and also had to rely on public transport to go where ever I needed to, especially for job interviews.

“If I was lucky, sometimes I could drive my parents' cars.

“When I did get a job, I initially still had to live within my means as I was still unable to stand on my own feet. This meant taking home-cooked meals to work.

“Initially, I also had to use t-shirts from friends as I couldn't afford new ones.”

By EUGENE MAHALINGAM
eugenicz@thestar.com.


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