Working with business owner clients can be difficult. In this case, I mean difficult in a good way (and I am not just saying that).
Business owners often have a greater number of financial questions as compared to non-business owner clients. I love this. This work allows me to delve deeper into their financial plan and develop solutions that help meet both their professional and personal goals.
Often, the single biggest hurdle to overcome is finding a starting point. How do the personal and business assets work together? Are my business partners on board with this? What is this going to cost? What if I already have a “guy?”
Questions galore, right? And what typically happens when you have too many unanswered questions running through your head at once? The same thing that happens to everyone: the feelings of being overwhelmed and frustrated creep into your already busy mind.
Being overwhelmed can create a tendency to procrastinate as opposed to addressing the problem.
Procrastination is certainly not a good idea. You’ve built this amazing business, and the last thing you want to do is watch it crumble due to poor planning.
My priority when meeting with business owners is separating the planning process into two parts, personal planning and business planning.
Business owners have a number of things to focus on when managing their personal financial plan. A few of the key questions are:
- Are you saving money outside the business – Business owners love reinvesting in their business. They understand it, they control it, and they believe they will benefit from a big sale come retirement. However, doing this may create liquidity issues. What if something doesn’t work out as planned? What if the business has a bad year or two. It’s critically important that business owners are creating liquidity outside the business. You don’t want to turn around one day and have all your wealth tied up in one asset.
- How is your money being invested – I have business owner clients who couldn’t be more aggressive in making business decisions. But when it comes to investing, they are as conservative as it gets. With that new found liquidity from above, you need to create a sound investment strategy.
- Have you looked at your estate plan – The answer, “my family will have enough,” is nonsense. You’ve built a business; you’ve created wealth. Now it’s your responsibility to plan properly for your family’s future in the event of death. Not only can you save on taxes and pass assets more efficiently with proper planning, but taking estate planning seriously makes the process easier for your family.
- Have you analyzed your 401k and profit sharing plan recently – A strong employer sponsored retirement plan may offer a great opportunity for business owners to fund their retirement and offer valuable benefits to attract and retain key employees. By implementing the “right” design strategy, business owners may defer up to $52,000 per year (depending on their age) into the plan each year. That’s $52,000 of money that is not going on your tax return. For the few who are looking to defer even more, a defined benefit plan might be something to consider.
- Do you have adequate key man insurance – Have you considered the impact of the death of a key person in your organization? This may be your best leader, sales person, or one of the owners. Would your business survive if one of these people were to die tomorrow? Key man insurance will not replace that person, but it will bring cash into the business at a critical time. And as we all know, cash is king.
- Is the buy/sell agreement up to date and funded – A buy/sell agreement plans for the fair transition of business ownership in the event of death, disability, or divorce of the business partners. We all hope you get to see the transition of your business to the next generation, but what if you don’t? What if you die? It likely means your business partners will now be in business with your spouse (or appropriate beneficiaries). This probably isn’t the best option for anyone. A good buy/sell agreement that plans for an orderly transfer of your business interests is a must.
- Do we have other executive compensation needs – Great businesses grow from great ideas and strong teams. As a business owner, you need to attract and reward key employees of the business. There is no “I” in team; having the tools to recruit the best talent for your business is essential.
When it comes to financial planning for a business owner, the first step is to take stock of all the potential issues. A simple understanding of the personal and business finances is a good place to start. Once a list is built and the issues are understood, it’s easy for key topics to bubble up and be discussed. I encourage my clients to tackle these key issues first.
It’s important to understand that everything won’t be resolved in the first step. Good financial planning for business owners can take years of commitment. Successful business owners recognize this and make a firm commitment to carving out time to understand the key issues, because at the end of the day, you’ve built a thriving and profitable business, so you deserve to reap the rewards.