Small-business owners pour everything into their enterprises, so it’s no wonder such dedication can cause tunnel vision.
Focused on day-to-day operations, owners often fail to spend time on personal planning, leading to under-insuring and underinvesting outside their own companies.
A successful business becomes a security blanket, as owners don’t sufficiently plan for events that could change the course of their financial well-being. Financial advisors need to help them run fire drills to deal with the following emergencies: liquidity, long-term disability, loss of life, long-term care, longevity and legacy/legal?
- Liquidity If a business owner has to write a significant check for something unexpected, where will that $10,000 or $20,000 come from?
- Long-term disability Owners are often disproportionate contributors to their company’s success. If they lose the ability to work, the whole organization will suffer. What’s the plan to protect against such a scenario?
- Loss of life What happens if an owner, business partner, integral employee or investor suddenly passes away? Life insurance funding buy/sell plans and key-person coverage can be effective in these circumstances, but business valuations are often much higher than the values they are insured for. The biggest concern that business owners ignore: becoming forced partners with your late business partner’s spouse.
- Long-term care Many baby boomers with business wealth are starting to wonder what will happen if they need significant medical care. If an owner takes time off from their company to help provide care for an ailing mother or father, the potential disruption to operations and revenue can be significant. Where will capital come from to offset the cost of long-term care for family members?
- Longevity What will it mean for a business if the owner enjoys an unusually long life? If they live to be 100, that could result in a huge expense for the business and significant burden for the succession team.
- Legacy/legal What does the business owner envision as their legacy for the next year, 10 years or 100 years? Various legal structures can be used to help ensure the business won’t be decimated by taxes when ownership is passed to a son or daughter.
The takeaway for advisors is that serving the best interests of clients can mean having to ask uncomfortable questions. Annual reviews should go beyond performance, allocation, and fees.
Try to uncover potential obstacles early: ask the tough questions and play the ‘what if’ game with your clients. This approach uncovers potential realities, but also creates a planning process that looks out for client’s best interests – even when they’re focused on something else.
For more information, please read:
The 6 L’s of Small-Business Planning | ThinkAdvisor