Business owners are some of the hardest workers in the world, but hard work alone isn’t enough to ensure success in the business world, and the same is true for your finances.
Every business owner faces myriad pitfalls that can make or break their retirement, even if their business is highly successful.
Here’s where we see business owners consistently run into trouble.
1. No Personal Financial Plan
Business owners without a personal, comprehensive financial plan may not know their Retirement Number: the amount of money and financial assets needed to support their desired retirement lifestyle and their ultimate bequests to family, relatives, friends, and charities.
- Without the information provided by a financial plan, the business owner has no idea whether their sale proceeds will be enough to cover these needs and desires.
- Without a plan for what their financial and personal future looks like after the sale, business owners sometimes get “cold feet” as their closing date approaches. Occasionally, they get all the way to the closing table, only to pull the plug on the deal.
By creating a personal, comprehensive financial plan, the business owner is well-informed about their future, reducing their fear of the unknown.
2. Insufficient Financial Assets
Business owners need to recognize the importance of creating outside financial assets. This is a simple matter of diversification, not putting all one’s eggs in the same basket.
Creating outside financial assets also allows the business owner to experience the magic of time and compound interest, which Albert Einstein refers to as the “Eighth wonder of the world. Those who understand it, earn it. Those that don’t, pay it.”
Lastly, building a portfolio of outside financial assets reduces the likelihood of making future investment mistakes.
However, this diversification is easier said than done for business owners.
The Owner Who Didn’t Understand the Importance of Outside Assets
I know an owner who understands treating his business as an investment, but he doesn’t appreciate the importance of creating outside financial assets.
He once asked me, “If I gave you $500,000 to invest, what would you do with it, and how much would it earn?”
My answer, of course, was, “It depends.”
When pressed further, I said, “Over the long run, a well-diversified portfolio of 60% stocks and 40% bonds will return between 6-8%.”
He said, “Why would I do that when I can put in another production line and get a 30% return on investment in the first year?”
In this case, the owner also felt that investing in his own business was less risky than financial markets.
Fortunately, the sale of his business was far enough into the future where he could fully realize that expected ROI.
However, this would have been the wrong decision if a sale was approaching since buyers typically don’t recognize unrealized future benefits of past investments.
Nevertheless, taking some money off the table periodically is a solid strategy.
The Danger of Overinvesting in Your Business
Business owners who fail to engage in a financial planning process will likely accumulate fewer financial assets.
By not participating in financial markets, these owners may acquire a belief that the stock market is a risky casino bet. Many owners are extremely confident in their own abilities and, thereby, choose to over-invest in their business, an illiquid, concentrated asset.
A retirement plan completely dependent upon the perceived market value of a business could be derailed if the business doesn’t sell, or sells for much less than the owner anticipated.
This could be the fate of the earlier owner who decided to install another production line instead of building up his financial assets.
I’ve also seen short-sighted business owners refuse to create company retirement plans for themselves and their employees, despite their need for financial assets and the obvious income tax advantages.
3. Distrust of Public Financial Markets
Business owners who successfully complete their exit transaction but don’t understand or trust public financial markets risk being poor custodians of the business sale proceeds.
The resulting under-performance of these financial assets could undermine the ability of those assets to generate income for the owner and growth for the owner’s generational and charitable estate planning.
Last year, I met four business owners who never engaged a personal financial planning team while they owned their businesses.
When they received their “big check,” they became frozen. They had no idea what to do next and were unable to make financial decisions.
When they finally made their money decisions, they either did it themselves or hired unvetted advisors. This led to some very poor, and in one case, disastrous, investment outcomes.
4. Vulnerability to Behavioral Finance Biases (Your Mind Isn’t Always Your Best Friend)
Very few things in life are as emotionally charged as money and investing. This leads even the most sophisticated investors to make serious investing mistakes.
Here are some of the most common psychological biases that can legitimately ruin your investments (these are one of the biggest reasons to hire a professional who is free of these biases, simply by being a disinterested third party).
5. No Post-Exit, Personal Life Plan
If no post-exit personal life planning is undertaken, a business owner is highly likely to experience seller’s remorse.
The overwhelming reason for this regret is their loss of meaning and purpose. These business owners spent years or decades building a life and identity around their business.
After the exit, people are no longer seeking their leadership and decision-making.
To make matters worse, many business owners’ social circle revolved around their network of customers, suppliers, advisors, and co-workers. They’re no longer plugged into their network.
For these business owners, the loss of purpose and social interaction leads to grief and depression.
A comprehensive personal financial plan addresses the business owner’s life after selling the business.
I always ask them to identify five things they’ll pursue after leaving the business.
These will be the key to finding a new purpose and maintaining their desired level of social interaction.
This could include extensive travel, spending time with the grandchildren, playing sports, engaging in a hobby, leadership in a non-profit environment, joining or creating a social network, or buying a vacation home.
The comprehensive personal financial plan then puts a price on these activities and incorporates that value in the amount required from the sale of the business.
Why don’t Business Owners have a Financial Advisor?
One of the things I’ve discovered in working with business owners over the past 30 years is that many of them don’t believe they need a financial advisor.
They look at their personal balance sheet and see their business, their residence, perhaps a lake house, and maybe a small 401(k) account through their business.
When it’s all added up, 85-90% of their net worth is tied up in their business, an illiquid asset. They think to themselves, “There’s nothing here for a financial advisor to manage.”
The typical financial advisor looks at these facts and reaches the same conclusion: “There’s not enough here for me to get paid to manage.”
The experienced financial advisor probably has a minimum investable asset threshold that the business owner doesn’t meet, and the inexperienced financial advisor needs to make money today to feed his family.
Both will walk right past opportunities to advise business owners. This creates a huge, underserved market segment.
However, there are financial advisors who take a different approach, typically Certified Financial Planners with a longer-term view of their client relationships.
They see the opportunity to be on a team of advisors helping owners build the value of their businesses, educating owners on financial markets, and creating a personal plan to guide the owner’s financial decision-making process.
Along the way, a trusted relationship is built so that, when the business is eventually sold, the owner has a better understanding of their financial future.
Financial Planning for High Earners: Your 360º Future™ Is Now. Let’s Get to Work!
Financial planning for high earners is as unique as you are. To fully understand the scope of your financial situation and develop the best financial plan, we’ll need to look at the big picture together.
That’s what we specialize in: Using a unique framework to examine every aspect of your life to build a roadmap to the life you want to live.
It’s called Your 360º Future™, a blueprint that looks at these major areas of your financial future:
- Estate & Legacy Planning
- Tax Integration
- Risk Management & Insurance
- 360º Asset Strategy™
Looking at all these areas of your financial life and integrating your goals for the future allows us to craft a unique plan that is best positioned to get you where you want to be.
Schedule a free consultation now to get started. We’ll dive into your assets, your income sources, your goals, and how we can work with what you have to get you on track toward the future you want to build.
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Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.