Does your business fail in providing for your family’s needs? Then you need to make changes to force it to make more money. The show’s guest today is Eric Miller, the owner and Chief Advisor of Econologics Financial Advisors. Eric talks with Nathan Shields about how your business’s main purpose is to serve your household. You have to treat your family as your parent company. Pay your family first to protect its assets and create more income sources. Change your mindset regarding business ownership and learn how you can make more money for yourself and your family!
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Making More Money For You & Your Family Requires A Mindset Shift, And How To Protect Your Assets With Eric Miller Of Econologics
People are getting tired of reading about us.
Personally, I love having you on because I love talking about money and talking about business with you and you’ve always got some awesome stuff to share. Eric is a Financial Advisor and works specifically with private practice owners through many different industries, not physical therapy but also veterinary, dental, etc. I got turned on to what you’re talking about from a video by Christopher Music and his conversation about how the household is the head of your organization.
I want to get into that a little bit because I want to talk about household KPIs and then a little bit as I teased on the Facebook group, about how to protect some of your business assets and also if you’re selling, how to avoid capital gains. We’re hearing a lot about possible inflation or in the middle of inflation happening. Before we get into all that, tell us a little about your thoughts regarding the household and the head of the organization, certain KPIs that we need to watch.
Take any nation. The household is the building block of any civilization. The financial condition of any nation is the sum total of all the conditions of the households in that country. Every piece of land, aside from that stuff that’s owned by the government which is becoming a bigger problem because they’re owning more assets than people are, companies, corporations, bank accounts, real estate, all of that is owned by individuals. It may be owned in limited liability corporations, trust or anything like that but those are owned by individuals.
The reason that we’re so bent on making sure that practice owners look at their household as the parent company because, in Corporate America, you’ve heard that there are big organizations, they have parent companies and then they own assets or businesses and all of those assets then feed for the benefit of whatever the goals and purposes are of that parent company. We took that concept and said, “That is when you look at it, that the household is the parent company,” because as a practice owner, you own the business but the business is there to provide for the benefit of the household.
This is my constant battle with a lot of private practice physical therapist owners is they’re not looking at that from that perspective. What that does is that they neglect to pay the household what they should from the business. They don’t adequately compensate themselves as the owner of the parent company. That’s where we try to make sure that they’re incorporating that in as an expense every single week. You got to pay the parent company. Even some of these private equity groups out there charge a management fee for managing all these practices. You can look at it the same way. Your parent company has goals and purposes. You want to have multiple income sources, get out of debt, have a vacation home, pay for your kid’s college and do all these things from the household level.
You got to make sure that the business is compensating you correctly to do that. A lot of PTs pay themselves like a W-2 wage for a practitioner role. You may take out distributions over and above that to pay for your lifestyle but very few are compensating their owner hat. That’s where, as we’ve talked about many times, is incorporating that 10% of the practice revenue. That’s your owner’s compensation. It’s not there to buy a boat. It’s there for you to expand your household, the parent company. It’s there to insulate it, protect it and create other income sources. That’s what that is for. You talk to a lot of PTs like I do. They get to that point of burnout. I’m like, “You’re not burnout.” The business is not in an exchange with you as it should be. You got to change that.
I never even thought about it where my household stood in relationship to my business. If you were to ask me and pin me down, I would say, “The business is up here and the household serves the business.” My wife takes care of things at home. We’re lucky enough to have that situation so that I can go work at the business, thus the business stands above the household. That whole thought process, upon learning it, switched my thinking and the mentality that the business was set up by me. I lost this somewhere, maybe because I didn’t codify it like you’re talking about. The business is set up to serve my family. It’s to serve me, my family, my future and my kid’s future. That’s the reason I set it up in the first place. Setting it at the top of the org chart, if you will, that this business serves the household and needs to flow money to it in order for the family to fulfill its purposes and its goals were new and novel to me. It could be for many other owners if they don’t have that mentality.The financial condition of any nation is the total of all the household conditions. Click To Tweet
I think it really does. It makes you look at your business a little differently. It makes you want to structure it so that it can run autonomously to a degree. If you own it, you’re always going to have some attention that you have to pay to it. At the end of the day, you should want to set it up so that you can manage from above and have it still provide you compensation. I’ve heard so many practice owners think that the sale of their business is where they’re going to create their wealth. I’m never going to pull any money out of the business. I’m going to put everything back into it. The value of the business is going to be my “retirement.” I’m like, “Why can’t you have it both ways? Why can’t you build a very valuable practice and at the same time have it pay the household so that you can create other income sources so you’re not dependent upon it forever?”
A clinic that’s valuable and gets more in the sale is one that is generating cashflow and abundance. In that case, it would be generating cashflow for your family and your household in abundance. That’s what provides value to a potential buyer. You have some KPIs for the household that you wanted to share with us because we have KPIs in our business and we should. If you don’t, talk to me. I’ll share with you some KPIs that you should be tracking in your business on a weekly basis. I was intrigued because some possible topics we could talk about are KPIs for the household. I want to hear those.
As a financial advisor, I tell people that the first thing that they automatically assume is that I manage portfolios, which is I manage stock and bond. That’s what most people’s experience has been with advisors in general. They manage my IRA or my 401(k).
Usually not well.
You said that. I didn’t.
My experience is my financial advisors in the past have not done a good job.
That’s where they spend their attention and time. There’s nothing wrong with that. If you’re going to manage a household and be an advisor for a practice owner, number one, you got to understand their biggest investment, which is their business. You got to understand how it works and how to set up systems for the money to channel to the household. If you don’t know that, it’s almost negligent as far as I’m concerned because there are hundreds of thousands of dollars. If you have a $1 million or $2 million practice and it’s not being used correctly, there are hundreds of thousands of dollars that are being lost every single year.
From the household level, I try to direct people because there’s so much noise out there about Bitcoin, cryptocurrencies and where to put my money in case there’s a crash. People have their attention spread all over the place. I’m like, “If you had some key performance indicators for your household, financial indicators. These are the things that are important.” Regardless of what’s happening out there, if you focus on these things then you’re going to be okay.
The first key performance indicator is what we’ll call your business growth rate. I say that because for most practice owners, your practice is your household’s biggest investment. You want that thing to grow at a certain rate. I would say minimally you should see a 25% growth rate over a three-year period and not one year. Now you’re asking me where I came up with that number, I forgot exactly how we came up with that but it sounded pretty good. Why is that important? Everyone’s worried about my investments, my 401(k), what kind of rate of return they are earning. What about your business growth rate? Are you tracking that? That’s where you’ll see your net worth increase by a lot.
Any purchasers want to see that too. They want to see your growth. It’s budgeting out a 10% growth rate annually.
It’s pretty close to that. You can do the same. That’s a 10% growth. If you want to do it that way, that’s fine. It shows that there is a growth rate occurring in that practice so that if I’m looking at that from a buyer perspective, this thing isn’t dying. It’s growing and expanding. There must be some attention to the marketing, promotion and all that stuff. From a household perspective, you should be looking at that like, “What has my business growth rate over the last three years?” If it’s sideways, that’s no bueno because that means that the business is only going sideways and the value is only going sideways. Your personal net worth is going to go up as the growth rate of your business goes up. That would be what I would call one of the KPIs.
You would measure it not necessarily as a business growth rate but you would measure maybe your personal net worth as something that is increasing 25% over three years.
The 25% business growth rate is a KPI but if it’s doing that then I would assume that the business value is increasing as well. When I talk about the growth rate, I guess I’m talking about the revenue of the business over that period of time. That’s one indicator that we would look at. Another one would be are you doing your 7% to 10% as your owner compensation? We’ve talked a lot about that. That’s a key performance indicator. I say 7% to 10% because it’s not real for a lot of people to do 10% right off the bat. If you’re in that range of 7% to 10% if you have a $1 million practice, are you taking $70,000 to $100,000 a year and channeling that to the household to create other income sources outside of the business? That’s a key performance indicator.
I would be frank with you. That’s probably one of the most important because if you can get that in place consistently over a 7 to 10-year period, you shouldn’t have any problems with money ever again. That would be one. Being on track to be personally debt-free in 5 to 7 years. What do I mean by that? That would be a key performance indicator. Am I on track to be personally debt-free? When I say personally debt-free, I’m not talking about your real estate debt. I’m talking about your house, credit cards, automobiles and anything that I would consider bad debt. I’d want to have that paid off in a 5- to 7-year period, including your house. People go back and forth on that just because they do but I’ve certainly never met a spouse that was unhappy because their house was paid off. I’ve said this before, there is a mathematical argument to not paying your house off. You can make that argument because of low interest rates and that but I’ve never seen anybody in a bad financial condition because they had their house paid off.
The opportunities expand if it is paid off.
They do because you feel secure now and this is the place where you have all your pleasure moments. How many kids did you get? You got seven kids. How many pleasure moments do you have at your house?
All the time.
It’s where you go to decompress and I think you should own that outright. I do.You need to understand how to set up systems for the money to channel to your household. Click To Tweet
It’s hard to compress with seven kids but I know what you’re talking about.
Another one would be your household income. I dare say that you should minimally have a target especially if you own a practice, of making over $300,000 a year of personal income. When you take into account taxes, kids’ costs, food and trying to build wealth in other places, if you’re trying to do that and making $120,000 a year, it is not going to work. It’s super hard. You have to have a bigger target and that and $300,000 is good and in excess of that would mean that you’re making enough money to be able to do all the things that you want to do in life and put away for the future.
If your target is under that, it’s going to be hard to do all three of those things. When I say, “Pay for your lifestyle, put money away to create other income sources and have discretionary income.” Those are the three categories. Minimally, you need at least $300,000 to be able to do those effectively. Everyone’s different. I get that. They live in different areas but that would be the minimum. More would be better.
I’ll give you two more. Your effective tax rate would be a key performance indicator. Your effective tax rate is simply the amount of total tax that you pay compared to the income that you make. It’s a key indicator because if it’s 40% or 50%, that’s bad. It should be under 30%. Now, I got all the people in California and New York pissed at me because they’re like, “It’s impossible. How can we do that?” I’m like, “You need to be proactive and find tax strategists out there that can help minimize that and stop going to your accountant to try to minimize your tax bill because he doesn’t care.”
I, unfortunately, learned that the hard way that the CPA doesn’t have the answers. When he told me after I sold my clinics some ideas that I had been shared with me on how to avoid capital gains tax on the sale, he was like, “You could have done that.” “What? You didn’t tell me that before.”
That makes me mad. It’s almost like if you would have done that to somebody as a healthcare professional and said, “You could have done that.” You got sued out of your pants.
Don’t rely on your CPA. Find someone who knows tax strategies and but follow the tax guidelines that help you avoid paying more taxes than you have to.
There are two million words of the tax code. There is nobody that knows that thing up and down but there are people that have looked through it and certainly could find different strategies for you. Two quick other ones would be the profit margin of your business. It’s more of a business indicator but I’m sure you’d want to keep track of that. It should be 20% or higher but from the household perspective, you would want to look at and then emergency reserves.
My viewpoints changed a little bit on this because, in the past, people are like, “You only need like 3 to 6 months of cash to pay for your expenses.” I’m like, “Maybe in that 6 to 12 months would be better.” For the business, you should have at least two months of business expenses at least because of what’s been happening and you have that factor of safety in case something bad does happen where you have to get shut down, get attacked or get sued or Medicare comes in there, audits and says that you owe $100,000 for whatever reason.
Pay the lawyers.
You got to be able to defend yourself or you’re going to go bankrupt. It’s okay to have money sitting in liquid cash as long as there’s a purpose assigned to it. Most people can’t stand it. They’re like, “It’s money sitting there. It’s losing value.” I go, “That may be true but it’s there for a purpose.” That purpose is for the protection of the organization.
It was a big push of mine with my coaching clients to make sure they have lines of credit and maybe increase those especially during the pandemic and make sure they’re in a place now, even though there’s not a foreseeable event coming and they’re usually unforeseeable. Make sure it’s together now. Would you recommend the same thing as a household, even if your home is paid off, to have access to a home equity line of credit?
People are like, “Why don’t I use the lines of credit as emergency funds?” as opposed to having the cash there. I’m like, “Why don’t you do both?” I would absolutely agree to get as much credit as you possibly can. If you have good credit, grab as much as you can. Get a home equity line of credit. If you even have a brokerage account, you can get what’s called a Securities-Backed Line of Credit. You can’t do this against IRAs and 401(k)s but if you have non-qualified money in a brokerage account, you can for most of the platforms, custodians would allow that but you can get a line of credit against the money that’s invested. Think about that. The rates are like 2% on those Securities-Backed Line of Credit. If your investments are making more than that, you can borrow money for really cheap and use that and your securities are the collateral for that.
Grab as much credit as you possibly can because you never know. You always do these things when the financial seas are calm. I would certainly do that. For your business line of credit, get as much as you can. If you have a building and a house that’s paid off, get a line of credit against that. You don’t have to use it but it’s sitting there. If you have reserves and you have a business line of credit then what happens is when everything goes to pot and you have practices out there that are trying to sell off at fire sales, you can swoop in there and pay cash. It can be a strategy for acquisitions as well. You can’t do that if you’ve got $5 million of debt.
Will Humphreys, my business partner, likes to say, “Profitability unlocks possibility.” The same can be said for cash. When you have cash on hand, the opportunities open themselves up to you.
They do and there are so many opportunities that you see out there. You hear that all the time, “If I had the money, I could have had this great opportunity.” You have to be worthy of that opportunity and put yourself in a good financial condition. I tend to find that when people are doing a lot of the right things financially and build up themselves to be financially worthy then good opportunities present themselves because they’re worthy of them.
Money attracts money, like attracts like. If you’re going to do good things with money then people will come to you because of that confidence then the universe works that way towards you as well.
It does and you’re right. It is all about confidence. People don’t give people money that they don’t have confidence in. Maybe they do but it doesn’t seem like it.When you have good finances, good opportunities present themselves. Click To Tweet
Those are some awesome KPIs. To review, there’s a business growth rate that’s a 25% increase over three years, the 7% to 10% revenue set aside and it goes directly to the owner compensation and being personally debt-free at least within the next 5 to 7 years.
You got to have a pretty short-term target on that one.
Get a household income of greater than $300,000 a year, get your effective tax rate down below 30% (don’t rely on your CPA to help you with this.) Get your profit margin to the business above 20% and make sure you have a large supply of emergency reserves, keeping six months as the target.
Imagine what your life would look like if all those things were in place. Would you be worried about what your frigging mutual fund did last quarter or if the price of milk went up from $2 a gallon to $4 a gallon? Would you be worried about all those things? Probably not because you’ve put yourself in a position where you don’t have to worry about those things. That’s why we call them those key performances. That’s where people’s attention should be as opposed to all the knucklehead stuff that they see out there.
Talk about that. Those are our household KPIs. What can we do with the conversation regarding inflation? For anyone that’s reading, what can we do to hedge against inflation knowing or seeing what’s happening?
There are a couple of things that you can do. The best hedge against inflation and people are going to say gold, silver, maybe cryptocurrencies and I’m not going to disagree. You should own those things as insurance. Those are insurance in case there is a currency collapse, which inevitably is the end result of inflation. It makes the money completely worthless. There is some validity in owning maybe 5% to 10% of your net worth of those types of things. You don’t have to own all. In commodities or something like that, all of your investments don’t need to go. Some people are like every dollar that they make goes into buying gold and silver. You don’t need to do that. It’s a lot.
Things that produce income are your best hedge against inflation. I use this example. Warren Buffett doesn’t care if the price of eggs goes from $4 to $10. Why? Because he owns so many businesses and means of production and his income is so high that it doesn’t affect him. Whereas if you’re making $50,000 a year on a fixed income and those things go up, it does affect you. Inflation hurts people that are on a fixed wage or a fixed salary because of that.
Going back to the whole trying to create multiple income sources, that is probably your best hedge against inflation is having multiple income streams. If you have a business that’s producing revenue for you and you have real estate or maybe you have other kinds of wealth-building vehicles, stocks, bonds or insurance products or whatever it is that’s feeding you income, that to me is going to be your best hedge against inflation. It’s investing in things that are going to pay you to own them. Those things should be whatever those things are. Having insurance with the precious metals commodities or crypto, although I’m not 100% sold on the crypto yet but my mind is changing.
To make some connections here. The 7% to 10% of revenues that you recommend the owner set aside as their distribution should be going towards some of these wealth creation vehicles, towards the future purchase of the real estate, into insurance vehicle for retirement, stocks, bonds, 401(k)s, you name it. It should be going into that stuff.
That’s where it should be going. It should be going to things that are going to either be able to produce income for you now or future income at some point in time but it shouldn’t be something that has those characteristics. If you do that consistently over a 7 to a 10-year period then that’s your passive income right there and then whenever it is that you decide to sell your business, that’s now another pile of money that you got to invest to generate more passive income. It’s a successful action to do that and that to me is probably a better way to fight inflation than to worry about buying 50 rolls of toilet paper.
Don’t put all your money in Dogecoin, people.
You got to be a bit intelligent but certainly owning assets that have the ability to produce something of value and that is the best hedge against inflation.
We were talking a little bit about this in terms of asset protection, having your emergency reserves and access to lines of credit. What more can you say about asset protection for our businesses?
Asset protection is like you own an asset, whatever it is. You can talk about asset protection would be like to prevent lawsuits. Take a lawsuit. Everyone is probably going to get sued at some point in their life and you don’t know when it’s going to happen. I’ve had clients that have had kids and their kids on their insurance. They get into a car wreck and all of a sudden, “Who’s going to get sued?” The parents are going to get sued. With asset protection, it’s trying to build some layers of obstacles around an asset. That’s it. It makes it more difficult for a creditor to be able to get ahold of the money. There are some tools that you can use for that. One would be liability insurance for your household, like a personal umbrella policy. It would be something I would highly recommend.Having more income streams is your best hedge against inflation. Click To Tweet
You don’t hear about those a lot. Those are things that you have to reach out to your insurance agent and ask about.
It’s phenomenal how every time we write a plan for someone and I’m like, “Do you have an umbrella policy?” “No.” “Go get one.” Call up your property and casualty person and inquire about how much a $2 million or $3 million umbrella policy would be. They’re not that expensive. It may range from $300 a year to $1,000 a year but that’s pretty cheap insurance.
The umbrella policy is almost like GAP insurance. It covers anything that the other insurances don’t cover.
It’s over and above. Your auto and your homeowner have certain limits of liability. If you got in a car wreck, think of how benign it has to be. You go out and have some wine, you’re with your friends, you’re on your way home and you get in an accident. Either you hurt someone or you kill someone. All of a sudden, you’re staring down at a $1 million judgment or $2 million judgment. It happens. Where are you going to get the money for that because the creditors are coming? That’s where an umbrella coverage would kick in to cover that expense right there. The limit you can get is $5 million. That’s the most you can get but I would recommend that you get at least $1 to 3 million, dependent on your net worth.
Insurance would be one category. Another layer of asset protection would be putting something in a business entity. This is why people have their real estate in LLCs because it’s difficult for a creditor to get ahold of that or to force you to take distributions or pay them from the LLC account. Anything over $250,000 of liquid cash, I would probably have that in either LLC or a limited partnership.
We’ve got lawyers that set up an organizational chart for your family. They’re the same for me. Our family has an LLC and our real estate is in a different LLC from our business. Each business has its own LLC so that those layers are limiting for anyone who wants to come after them.
Everything is compartmentalized so that they’re all in their own little entity. You can sue this one but that doesn’t mean that you can get access to the other ones as well. I took a lot of time and money to set all that stuff up but it’s worth it because now you don’t have attention on that and you can go out and acquire more assets and those things. Everything’s set up. It’s a pain to set some of this stuff up but what’s worse? That or staring down the barrel of a $2 million lawsuit. Pick your poison. For $10,000 or $5,000, you can do all this stuff. That would be business entities. What else could you use? Each state is different, too. In a lot of states, annuities and cash value life insurance are completely protected assets. You can have any money in there as protected and in certain states, your home is protected. You can look at the state statutes and find out which of these investments are assets. Those are some of the tools that you have.
The last thing I want to talk about is how to minimize capital gains on the sale of a practice. This isn’t something that a lot of owners that are reading are in that stage. We’re not necessarily catching them at the right time. What can owners do as they foresee a potential sale in the future to minimize their capital gains here?
This is where you have to sometimes think outside the box but the sale of your business is going to be one of the largest financial transactions of your life. The capital gain tax on there, regardless of what happens in the next year or so, as far as it going up to 40% or whatever it’s going to be, even 20%, 25%, 26%, 28%, that’s still a lot on a $3 million sale, $5 million sale or $20 million sale. That’s a lot of dough. There are strategies out there but you’re going to have to consult with more of what’s called tax strategists. They can come up with ways that are certainly legal, that would help you either defer the tax, like a 1031 exchange would be a tax deferral strategy for real estate to be able to not have to pay all of the tax upfront.
There’s one in particular that we work with. It’s called a monetized installment sale. It’s a strategy using an installment note. An installment note is something that you get and then you’re going to give payment over a period of time. You combine that with a loan from a private lender and it’s a strategy for you to defer your capital gain for the length of the installment note. That would be 30 years or so. You would be able to get maybe 90% something percent of the sale in liquidity up front and then you’d have the ability to invest that money. You’re still going to owe the tax for 30 years.
The amount of the tax doesn’t change. If you owe $200,000, you’re still going to pay $200,000.
It’s depending on what capital gains rates are in 30 years but you get the time value of money. I get more money to invest over a 30-year period. Are you better with money than the government is?
I would rather have that money.
I’ll give it to them but in 30 years. That’s fine. That’s why it’s not like tax evasion. It’s tax avoidance. You defer it for a 30-year period. There has to be a legitimate reason why you’re doing it and you need to go to a professional. There are certain things that you can do but you can always call me up. We have relationships with people that can do that.
I love the conversation. A lot of the stuff that I’ve been espousing on the show and also to my individual coaching clients, the fact that you could cover a lot of those bases is huge. I appreciate it. If people have more questions, how do they get ahold of you?
They can go to our website. Go to Econologics and there’s a lot of information on there. You can download a book for physical therapists called The Financial Success Guide For Private Practice Physical Therapists. We have plenty of financial assessments on there that measure the condition of your household and your practice as well. We have a plethora of resources or you can email me directly at Eric@Econologics.com. Those are the ways you can connect.
Thank you so much for taking the time. I appreciate it.
It’s my pleasure. Until the next time. Have a good time.
Thanks. We’ll talk to you later.
- Eric Miller – previous episode
- The Financial Success Guide For Private Practice Physical Therapists
About Eric Miller
Eric Miller has been in the financial planning industry for over 20 years. He’s a co-owner of Econologics Financial Advisors – awarded an Inc. 5000 honoree for 2019. As the Chief Financial Advisor for the firm, Eric has had the good fortune to have over 10,000 financial conversations with private practice owners in various healthcare industries and helped guide them into a more optimum financial condition using a proven system.
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