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Business or hobby5/24/15
Woodworking can be a great hobby. For a few it is a great business. When you run out of energy or productive life, what will your life have produced? A good living for your family? A secure retirement income? A jump start for your kids?
I've been in the wood business for 20 years and it has always amazed and depressed me how many seemingly successful millwork/cabinet/lumber operations I've seen sold for the replacement cost of their equipment inventory or less. Often the business is just a means to pay for the real estate on which it operates, the real asset.
The rare exceptions I can think of are:
- Companies that have developed a successful product line (trademarked, patented, etc).
Most traditional woodworking businesses are considered boring, consistent, non-scale-able with low growth potential. Yes it is annoying to read about dot coms that have yet to earn a dollar being bought for tens of millions while profitable woodworking operations are hardly considered a business, but it is what it is.
If your business is more like a really good job than a valuable enterprise, take the money you make from your good job and invest in SEP IRA or buy a commercial space to operate from instead of renting.
At the end of the day, having money in real-estate or stocks is a safer bet than hoping the marketplace will value your business fairly (whatever that means) when you decide to cash out.
My exit plan is to not.
Already my business can function pretty well on a daily basis without me. This has been proven to me by 6 stays totaling 29 days in the hospital over the last 6 months. Only two of those were "planned" (as a result of previous unplanned visits). Each of the others were ER visits turned into admits, so there was no preparation done. I don't think anyone (other than a couple of the employees) even noticed.
I had high hopes that one of my kids would want to take the business over, but neither have any interest. Both worked for me for a couple/few years, but it wasn't their thing. Maybe things will change as time goes on, but I've given up that hope. Now, my plan is to make the business able to function without me at all. This will allow me to "retire" as much (or little) as I want to and still receive the benefit of income from the business. When I'm gone my heir(s) will find it pretty easily marketable to anyone who is willing to make an investment for a good return without any required knowledge of the industry. This will also give me the option, if I change my mind in the next 30-40 years (if I live to current life expectancy), of selling the business myself.
The business is already at a point where it is self sufficient enough and producing enough income that it's salable, but then I'd go stir crazy trying to keep my mind engaged every day.
We do also own the real estate, but it's not so much as an anticipated retirement fund as a cost effective way to have a place to do business. It will be paid off in 5 years if we don't accelerate payments, and then we will have another chunk of money to invest in expansion or retirement, or a combination thereof.
In case none of those things work out, we do also have a SIMPLE IRA program set up. My wife and I have been contributing for about 20 years; we should have started 28 years ago when we started the business but we hardly had money to buy diapers (we used cloth and washed them ourselves), never mind thinking about 50 years into the future. And, probably like most folk, we invested a minimal amount at first, and have only been able to increase to "recommended" levels as income has gone up and expenses have gone down (no kids, no mortgage). So while we've been saving for a relatively long time, if this end up as our sole income we're going to have to keep saving a lot from here on out if we want to live in the manner to which we've become accustomed.
David's observation "if this end up as our sole income we're going to have to keep saving a lot from here on out if we want to live in the manner to which we've become accustomed." is right on. Compounding is an amazing thing but requires time. The sooner you start the better off you will be. Building a future source of income should be part of every business plan. How many of you have crunched the #'s?