Example of a Business versus a Profitable Hobby

Harry Hobby

Harry worked as a mechanic for a dealership and became the most respected technician in the shop.  After getting tired of making the dealership rich off of his efforts, he decided to open his own shop.  He cashed in his retirement account and got a note from the local community bank to fund the start-up costs.

Harry started out working alone doing all the repairs and front desk duties himself.  As his business grew and his reputation in the community increased, he hired on three other mechanics to help.  The business began to make money and Harry could pay his creditors, the employees, his bills, and even have some left over for himself.

However, between the home mortgage and other committments, the business never seemed to produce enough for other needs.  Harry was lucky to avoid a disability (almost 1 in 3 odds) or a premature death along the way.  When it came time to retire, he began to look at his options.

Unfortanetly, the business was worth substantially less than he thought.  He had $80,000 in a retirement account, $300,000 from selling the shop, but not much else besides social security to count on.  Harry faced an uncomfortable decision of whether to keep working longer than he desired, risk outliving his assets, or significantly reduce his lifestyle.  It seemed unfair as he always took care of his employees and worked long hours.

Paul Planahead

Paul had the exact same experience as Harry, however, he used a small portion of the business revenues to make sure he and his family were rewarded and protected.  He protected his income with disability income protection in case he got hurt or sick, made sure he had adequate life insurance so his family could maintain the same standard of living if the unthinkable were to happen, and took advantage of the tax code to efficiently put away some of the business profits to fund a portion of his retirement.

As a result, Paul was able to sell the shop for the same price as Harry, but due to putting money away outside of the business, he did not have to worry about outliving his money or reducing his lifestyle in retirement.  If the unexpected had occured along the way, Paul and his family were taken care of.

Which position would you rather be in?

You took a substantial risk when you started your business, you pay bills that most of the wage earning population couldn't imagine, and work long hours to make the business work. 

Are you compensating yourself adequately for the risk and effort you put into your business?

Your answer to that question determines whether you are running a business or just a profitable hobby.  If you want to run your business as a hobby, enjoy it.  If you want to utilize your business to achieve your financial goals, then it is important to plan ahead and use the special oppertunties that owning a business presents to you.

4 Ways to Exit Your Business:

You will eventually exit your business, one of four ways:

1. Retire and/or Sell It.

2. Die

3. Get Sick or Hurt

4. Go Bankrupt

Hopefully it will be the first option as the next three don't exactly sound appealing.  Our job is to help you maximize the opportunities in the first option while also protecting against the other three less desiresable ways to exit the business.

You owe it to yourself and your family to reward yourself for the risk and effort involved in running your own business.