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Constructing a Money Tree

Rebecca Smith, Founder and President, A.D. Morgan Corporation

When I founded the A.D. Morgan Corporation, a commercial construction company, in my home at age 29, I had only one thing on my mind: getting contracts to build buildings. Very soon after securing a few contracts, I added one more item to my basic agenda: how to manage the modest but increasing wealth I was accumulating. There was a great responsibility that came along with these earnings. Fear of losing my newly found profits and being named a mere "entrepreneurial statistic" motivated me to seek advice on retaining and managing my wealth.

Within about a year, after the business had gone through one tax cycle, I scheduled a meeting with a financial consultant, a referral from my CPA. She listened carefully when I explained that I didn't actually have big money but felt it was important to understand what to do with it when I eventually made it. I wanted to get my financial education out of the way so that when the money started rolling in (classic case of entrepreneur's optimism), I wouldn't be distracted from operating the business. My metaphor for the process was a tree. Basic knowledge of money-management instruments made up the trunk and branches, and money was the leaves I would hang on those branches as it became available.

My company has been growing at a rate of approximately 100 percent a year. Now that it has two offices, nearly 50 employees and annual revenues of $35 million, I can confirm that while money doesn't grow on trees, learning in advance what to do with it was a good strategy. Having a plan enabled me not to squander it and to feed the business while providing for the future.

Build a Strong Defense

It was clear to me that the trunk and branches, or fundamental issues to consider in managing wealth, were as follows:

  • How to save it short term
  • How to save it long term
  • How to leverage it (company vs. personal)
  • How to protect it from creditors in case of a business failure (protected vs. non-protected assets)

Absent any profits to invest, we began by building a strong defense. Our first task was to secure the immediate future—in other words, protect the current assets. That meant the key personnel: the president, project manager, estimator and sometime secretary—me! I purchased a disability policy with an option to increase the premium/benefits to reflect increased future income. This provided some limited personal security.

The next component, another defensive strategy, also lent support to the pending offensive strategy. At my age, life insurance was affordable, and a relatively inexpensive way of getting collateral to assist me in securing a credit line at the bank. As I was the 100 percent stockholder and driving force of the company, lending institutions wanted to know that they had a secured loan, both in life and in death. Through the purchase of a conservative whole-life insurance policy, I was using my very limited capital to leverage credit for the company's use, while also building long-term personal wealth that was protected if the company failed.

Retain Profits for Growth

Within a short time, A.D. Morgan was able to show some profitability. However, those profits tended to shrink as federal income tax became a larger expense. We looked at options to keep earned profits in the company and available for future growth. For that purpose, my financial advisor recommended implementing a profit-sharing plan.

Initially, the company allocated a discretionary portion of the year's pre-tax profits into the profit-sharing plan, then distributed the money to all employees pro-rata on the basis of their compensation. This was an excellent opportunity for me to retain earnings, due to the spread in income levels between the few employees and myself. The plan was in place for about three years before that advantage was lost to an increased number of employees and more wages. At that point, we replaced it with a more conventional 401k, with matching funds.

Sharing the profits with employees decreases tax liability. However, reducing profitability for tax purposes does not impress banks and, in our case, bonding agents, who are looking for increased profits commensurate with increased revenues. In the commercial construction business we have a banker who is interested in solid and escalating retained earnings, and a bonding company that leverages those same dollars to allow us more growth on the revenue side of the business. Without the increasing support of these two governing parties, our growth could be stalled, if not eliminated. The answer was clear: Provide a competitive employee compensation plan, and leave the balance of profits on the bottom line to provide a much-needed energy source for corporate growth.

Evaluate Your Asset Strategy

As a result of these decisions, my personal wealth grew in only one area, the value of the business. It was not advisable to take money out of the company until the need for increased retained earnings came into balance. The money I took out was limited to a very humble salary that covered my home mortgage and living expenses.

During the years I plowed earnings back into corporate growth, I did make one major investment—I bought a small office building. Our rent had jumped to an appreciable level, and my thought was that I could grow an asset by renting an office from myself, thus keeping the rent money "in the family." Real estate is a very important component to any financial strategy. It is a simple way to diversify and, if selected carefully, can enjoy exponential growth. In some cases, it can be protected from bankruptcy and capital-gains taxes.

In my case, I maximized the "protected asset" opportunity by maintaining a strong equity position in my primary residence, thus increasing my defensive financial position. On the other hand, while the purchase of the office building was a measure to keep profitability, as an investment property it was a non-protected asset. My strategy for the building was to maximize the debt on it and use the cash "as needed" in the business. This illustrates how the same type of asset must be carefully evaluated and used in whatever way serves the best interest of your total financial strategy.

Accomplish Your Personal Goals

For years, leaving retained earnings alone to feed corporate growth was essential. But, there came a time when moving some of the wealth away from the company and into my personal accounts was advisable. The reasoning for this was, first, it provided some protection against the company's creditors and, second, it allowed me to build a more diverse financial portfolio.

As I began moving wealth to other investments, I reviewed my position on protected vs. non-protected assets and considered the following options:

  • Protected assets, long-term gain: annuities and life insurance
  • Non-protected assets (liquid): stocks, mutual funds, real estate (other than primary residence)

My primary concerns are to preserve my personal financial future and maintain ready cash to react to market fluctuations as the company demands. With this clear understanding of the goal, coupled with the financial instruments described above, it is now simply a matter of distributing the wealth by hanging the leaves on the branches of the tree.

Finally, I can't write about building wealth without stressing the need to exemplify true leadership by sharing with others and offering benefits that secure your employees' financial futures, as well as your own. Remember that you did not build your company alone. You have a team, and they deserve your consideration when you're making decisions regarding how best to invest the wealth they have helped you earn.

For me, the responsibility of being a leader involves understanding the true value of wealth. I have always been moved to give back, not only to my employees but also to people who were not as blessed as I was. After all, I was living my dream of owning a construction company and, as a bonus, it was also growing to be more successful financially. A.D. Morgan has made a practice of supporting a number of charitable organizations in and around our community. As we grow, our contributions outside of the company grow, too. Personally, in my long-term financial plan, I have established a trust with provisions for continuing to give back into my old age and after my death. I'm convinced that the very leadership characteristics that made you an entrepreneur can guide you in making both prudent and generous use of your newly gained wealth.

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