Although every individual should think about their future and devote time to their long-term financial plan, it is especially crucial for small business owners. Their unique needs further complicate the already complex process of planning for the unexpected. And generally, financial planning for business owners needs to be more creative and detailed than planning for other types of clients. Small business owners are often so busy dealing with the day-to-day demands of their businesses that they postpone their own financial planning. They tend to rely heavily on their financial planners, so we must understand the unique needs of these clients.

For many small business owners, their wealth is tied up in their business — for better or worse. It can be tempting for these clients to assume that their business is their retirement plan, that they can sell their business when they are ready to retire and they do not need anything more formal in place. However, that is often not the case.

It is important for business owners to actively build assets outside of their business to diversify those used during retirement, and it is best to begin this process as early as possible. In the end, if they have no assets and are unable to sell their business, they are likely going to need to continue to work to provide an income for themselves and for their family.

Expect the unexpected

Unfortunately, it is not uncommon for individuals to be forced into retirement early due to circumstances in their personal life like family or health issues. These scenarios exemplify why it is so important for business owners to create a business succession plan. Financial planners must ask their clients: What is their continuity plan? Do they have a buy-sell agreement? Is it funded? How will the business stay open if any of the business issues arise? I tell my clients that the following eight things must be addressed in any buy-sell agreement:

    • Death
    • Disability (for both the owner and his or her spouse)
    • Departure (such as another shareholder’s or partner’s retirement or decision to pursue other opportunities)
    • Divorce
    • Deadlock (disagreements between equal owners to sell)
    • Disagreement (resolving disagreements with minority owners who might be forced out of the business)
    • Default (an individual shareholder’s default or bankruptcy might cause an issue with the other owners of the business)
    • Determination of value (each business owner wants to have a fair value for his or her interest) 

Without a buy-sell agreement, the business owner is left to deal with these issues. Of course, every business is unique and has different planning needs depending on the structure and the number of owners or partners. It is surprisingly common for one business partner to be unready to retire. This is one of many obstacles that might obstruct a client’s smooth transition to retirement.

Additionally, I ask each of my clients a set of 20 questions to help them determine how financially and mentally ready they are to exit their business. I have found that the majority of clients are not ready, either mentally or emotionally.

Sometimes the value of the business lies in the owner’s expertise. In these scenarios, it is critical that the owner brings in an apprentice or junior associate to learn the trade and develop the business proficiency to take over with competence.

Many business owners pay for personal expenses such as transportation costs, cell phones, computers, travel and health insurance through their businesses, and many fail to take into account that their spending during retirement will need to increase to make up for those costs. 

Of course, the impact of inflation and taxes on the income needs for business owners is similar to non-business owners but could be even more impactful to business owners who are selling their business. The decision regarding the type of sales transaction will determine how income taxes will impact their cash flow.

There are many scenarios a good financial planner will help small business owners navigate while also helping them understand that they need to set aside money for retirement, whether in an IRA, a 401(k), or another investment vehicle.

Don’t start your exit planning at the bargaining table

Most small business owners are completely devoted to their business. Their thoughts are constantly wrapped up in keeping everything running smoothly and maintaining growth. While this is good for business, it can be bad for retirement planning. Too often, clients do not consider their exit plan until they find themselves at the bargaining table.

A financial planner should give clients the tools to be prepared emotionally and financially for retirement. Although it can be difficult for many business owners to imagine the day they will leave their business, preparing for it now can avoid many headaches down the road. Having an exit strategy in place well in advance of retirement and funds set aside outside of the business can provide peace of mind and a safety net that allow clients to keep their focus on what they do best — running their business.

Small business owners require some creativity from their financial planners when it comes to their retirement planning. Any business owner will tell you that his or her business is completely unique. Their product or service, their employees and their commitment cannot be imitated. Similarly, no single retirement plan can be carbon copied from one business to another. When it comes to small business owners, planners must be resourceful with insurance and investment tools, crafting unique solutions for each client that complement his or her business.

Building the right team

There are many competent financial planners, but unfortunately, not all are qualified for small business planning. Planners should be aware of their abilities and know when to bring in a specialist to assist with the business exit plan. Planners should also be focused on working in tandem with attorneys and tax advisors who also have this type of expertise to develop a more comprehensive business succession plan. When a team of qualified advisors works together, the business owner, their customers, their employees and their families all benefit.

All clients should expect a financial planner to understand what keeps them up at night, what is most valuable to them and what their goals are. Planners working with business owners must appreciate what the business is and what the business means to the client. For most, it is a source of income, a source of concern and, ultimately, a source of fulfillment.

As the saying goes, “a goal not written is only a wish.” For small business owners, a lack of planning could end in disaster if there is no exit plan or business succession plan. Without a plan, they may miss out on taking full financial advantage of what is usually their largest asset, the asset they have worked 20 or 30 years or more to build. A financial planner’s job is to help business owners protect their most valuable asset. That means providing them with a comprehensive financial plan that takes their business into account, provides a solid retirement strategy and considers their needs from a benefits perspective.

See also:

Business succession planning: The day after disaster strikes

A case study in life insurance as a succession planning tool

Succession Planning: Just be SMART

 

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