Schoenbeck said there also are advisors who are aggressive in the M&A market, much to their detriment. They go out and borrow a lot of money to buy up books of businesses and they take on liability with the assumption that the market will continue to grow, he said. “But they find themselves in trouble because that revenue growth does not materialize” he said.
Occasionally, Schoenbeck said, advisors see small business owners get squeezed when their over optimistic revenue assumptions leave them with tax liabilities. “The revenue doesn’t show up and now they have to pay the tax man,” he said.
One way to avoid this is to be more conservative in projecting revenues, Schoenbeck said.
“If you are running a business and making assumptions that you can pay those liabilities based upon never-ending continued growth in your business, that’s when you start to put your business at risk,” he said.
This is tied to advisors not building up a cash reserve, which is a common problem in the industry, he said. “Whether it is a payment to staff or taxes or a loan that you are paying down because you acquired a business, that’s a simple tax flow exercise and there really isn’t anything sexy about it. But the fix in that scenario is to build up their own cash reserves,” he said.
Schoenbeck said most financial planners tell their client that they should have three- to six -months of reserves set aside in case they were to lose a job, or something were to happen. Advisors should generally follow the same principle with their firm. In other words, they should practice what they preach, he said.