The New Year is a great time to challenge our assumptions concerning what we know about our businesses. A fresh look includes questioning whether business givens are all that accurate. You may be aware of Donald Rumsfeld’s famous comment about the dangers of the unknown:
But there are also unknown unknowns…the ones we don’t know we don’t know…it is the latter category that tend to be the difficult ones.
In the business world, the point of this idea is that we need to keep an eye out for those things we don’t know – but think we do. Bad assumptions lead to bad business judgments.
5 assumptions that can lead to bad outcomes
Paraphrasing to protect the innocent, these comments I heard in 2014 demonstrate the business risk of bad assumptions you can avoid in 2015.
- “I start tax planning late in the year, after I have an idea how the business is doing.” This sounds good on paper, but unfortunately, your options are limited late in the year. Sure, you can make some last-minute equipment purchases, harvest some losses and possibly prepay a mortgage. But the really significant tax opportunities require planning. For example, if you want to capture deductions with a qualified plan or save executive taxes with a nonqualified plan, you need time to research, create and fund these plans. It’s more than just writing a check late in December.
- “I know the law on this topic because I researched it recently.” I’m preparing to teach a graduate school class on business law and wanted to update my knowledge, so I attended a university lecture on insider trading in December. The professor did a great job. But a week after his lecture many of his points were rendered moot when a federal appeals court in New York overturned two insider-trading convictions. As another example, the Affordable Care Act has already had more than 42 changes from all three branches of the federal government. It’s not the same law it was even six months ago.
- “Exit planning begins when I’m ready to exit.” Would you want your employees to say they’re not going to worry about retirement planning until they retire? Business exit planning rarely entails just packaging the company financials and walking over to a business broker’s office. Because of some S Corp tax rules, I tell business owners they should start exit planning as early as 10 years before actually selling or leaving their business.
- “My business will sell for what it’s worth.” This common misconception assumes a perfect marketplace where the seller’s and buyer’s assessment of the business are identical. Unfortunately, no market is perfect. From the buyer’s perspective, the value of a business is dependent on what their objectives are for that business. The offer could be based on the company’s liquidation value, earnings values or strategic value. For the seller, there is the opportunity to proactively take steps that increase the market value of the business. Just as a $4,000 investment in updating a house’s kitchen can increase sale value by $20,000, so too can a business be prepared and staged for sale. Sometimes it is a simple as making capital improvements, finding the right intermediary and timing the market to maximize price.
- “It’s best to keep my wealth in the business so I can keep control of it.” This is a classic “unknown unknown” for owners of privately held businesses, particularly family businesses. It is assumed that, as wealth builds in the business, it should remain in the business, where it can stay under the watchful eye of the owner. In reality, a family business is almost never a good place to park family wealth. It subjects these assets to additional creditors, generates additional taxes and can create long-term liquidity issues for the owner and family.
5 ways to avoid bad assumptions
No business owner wants to rely on erroneous assumptions. There are ways to maintain a healthy, ongoing review process of business judgments.
- Stay current – Busy owners sometimes see knowledge as an item for the to-do list. Learn a topic, and move on. A better approach is to dedicate a certain amount of time to ongoing education. Commit to a set time each week to read relevant magazines, blogs and business journals. Look at knowledge as an ongoing business process rather than a single transaction.
- Learn from others – Involvement in breakfast clubs, study groups and online chat rooms is more than just a diversion. It’s a way to test assumptions, identify unknown unknowns and maintain a healthy check on egos.
- Use an advisory board – Particularly for single-owner businesses, an advisor board is one of the most effective ways to get a big picture perspective on the business. Trusted advisors can help challenge assumptions and question business judgments.
- Use advisors, not transactors – A common complaint I hear from owners who have fast-growing businesses is that they’re outgrowing their advisors. This does indeed happen, and the owner must make sure the advisor team has the competence to advise. Attorneys should do more than draft, accountants more than report and financial advisors more than execute. Again, your advisor team should be able to test your business assumptions.
- Work ON your business, not just IN your business – Often the source of bad business assumptions is simple inaction. What worked in the past is the model for the future. A good way to avoid this potentially fatal mistake is to dedicate the time and resources to work on your business as an actual asset. If, on a structured basis, you step away from the day-to-day to treat the business as your key asset, you may expose the assumptions that need to be challenged and reworked. You can be your own best judge, but you have to take on that role.
Recommended article: Chomsky: We Are All – Fill in the Blank.
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