A large portion of the financial planning profession, in my observation, is directed at planning for people that have a somewhat defined career path, work a nine to five job, and who are able to contribute money to a 401(k)-plan provided to them by an employer. This does not reflect the reality that many business owners face. We’re going to look at five ways financial planning for business owners differs in this week’s Inside Look at Building Towards Wealth.
Throughout my career in financial services and having talked to hundreds of business owners, I have heard one common complaint about the planning process. There is not an adequate appreciation, by the advisor, for the value many business owners may realize by reinvesting in their business. This is the first way that planning differs for business owners.
The truth is that there are unlikely to be many things that could produce a better return on investment for a business owner than them having a well-run business with a well-executed business plan. There is a very good case for them to place the majority of their net worth into their business.
Business owners should definitely diversify and hold assets that are not business related, but the flywheel of wealth generation for a business owner is usually propelled by the business. Good planning will appreciate that and plan around it.
The second way planning differs for a business owner is that there needs to be an accurate business valuation. As I mentioned in my previous article, How Much is My Business Worth, it is necessary for a business owner to have a reasonable business valuation in place for their planning purposes. Without that business valuation in place, it is challenging to do accurate planning.
A formal business valuation may cost upwards of $15,000 or more. This type of valuation is not necessary for early planning purposes. Although it may be necessary as we near a liquidity event. There are several tools out there that can help give a number that is useful for planning purposes as well as the planner can work with your CPA to provide a reasonable number.
The third way planning differs is that business owners usually have one single fail point in their financial plan, and that is their business. Despite how well run the business may be, there will always be factors beyond your control as business owners, which in turn can affect the business’ financial wellbeing.
Having appropriate amounts and types of insurance on the business owner, their business partners, as well as their key employees is essential to make sure that their financial plans are realized even if an unfortunate illness, accident or even death were to occur.
Financial planning for business owners will help us understand the myriad risks they face and help us manage them as needed.
The fourth way planning for business owners differs is tax planning. Nobody loves taxes, but I believe business owners dislike them a little bit more because they must deal with so many different versions. Self-employment tax, sales tax, income tax, unemployment tax, you name it they must plan for it.
Tax deductions are an excellent way to reduce your taxable income and possibly even reduce your tax rate. Good financial planning will make proper use of the deductions available to you as a business owner.
A qualified plan could be the best first step and we have talked about that in our previous posts Should I Set up a 401(k) for my Business and Should I set up a SEP or SIMPLE IRA for My Business.
If you want to learn more about ways that proper planning could help reduce taxes visit my website and download our guide Planning for Business Owners.
Finally, the fifth and possibly most important way planning for business owners differs is the business exit. Every business owner will leave their business, the only difference is if it is well planned out and orderly or not.
Financial planning for the business owner can help mitigate some of this risk by utilizing proper insurance as mentioned above. If we do get to the point that a business owner is ready to reduce their involvement or transition out of the business through a sale, whether internal or external, there are still a host of issues that if they are not planned for properly can cause huge headaches.
There may be a host of professionals involved in the sale of the business. There is obviously the buyer, the attorney(s), accountant(s), business broker, banker, executives of the company, consultants, and financial planner to name a few. The professional on the business owners’ team that is likely to be heavily involved with the owner both before, during and after the sale is the financial planner.
Someone needs to sit as the person that always has the client’s long term vision in mind. That person is often, and in my opinion should be, the financial planner. It is like a football team. You could have all stars at every position but if they are not all operating from the same playbook, with the same vision in mind, you will not be successful. The client is the owner of the team but someone should be the coach.
The planner can also help level set the business owner for what is reasonable in retirement, to make sure they have done enough outside of the business sale to have a successful retirement, help make sure there are not any tax or estate surprises that happen after the sale, as well as a host of other services to the client.
I have seen and heard plenty of horror stories about owners engaging with an advisor only after they receive their check from the sale only to be surprised by several unfortunate tax related consequences that could have been addressed through prior planning.
There are several ways that good financial planning can benefit the business owner and several ways it differs from conventional financial planning. You can do many of these things on your own, just like you can climb Mount Everest by yourself. Just know that there is value in both doing it as well as getting help when you need it.