While many advisors work extensively with successful small business owners, many struggle to properly serve that client segment, because they underestimate the role and impact of the most important asset in such investors’ lives: the business itself.
Thanks to the bold and daring approach such clients take to building their companies, their businesses are often the most aggressive investment in their broader portfolios.
The same positive outlook that is so vital in building a successful company can sometimes obscure an entrepreneur’s view of the importance of near-term planning and risk management.
They frequently underestimate the need for a diversified portfolio of traditional investments, since they believe they will eventually sell their company for a premium valuation. Unfortunately, this approach can expose them to undue risk if the business stumbles.
Financial advisors have an absolutely vital role to play for business-owner clients by helping them to see how their company fits into their broader portfolio and how to protect it — and their personal financial plans — from risk.
These three best practices are a great place to start:
1. Help them separate their personal finances from the business.
Many entrepreneurs overcommit personal funds — including retirement savings and emergency reserves — to help their companies get off the ground.
As a result, the line between personal and business finances gets blurred, leading to risky missteps such as taking out personal loans or lines of credit to fund business operations, rather than opening these financing options under the business itself.
Advisors can help clients resolve this by stressing the importance of developing a “personal business plan.” For many entrepreneurs, the exercise of drafting a formal plan for the business — complete with a list of goals, a statement on growth strategy, revenue streams, expenses, related properties and assets and key individuals — is a familiar exercise.
By using the traditional business plan as a framework, advisors can “speak the client’s language” and help them understand how a written plan, which incorporates their dreams for retirement or travel, the legacy they want to leave for heirs or charitable causes, their lifestyle priorities and their wealth across all assets and accounts, can help them take a realistic look at upside and downside scenarios for their personal life and steer them toward personal success.
2. Implement risk management strategies that protect the business from the rest of the portfolio, and vice versa.