The Achilles Heel of Wealth Planning for Business Owners

Small to mid-sized business owners pour themselves into building a valuable business, and if they have a retirement strategy, it likely includes “selling the business”. 

Many business owners have a Wealth Advisor who diligently seeks to ensure the owner has a plan for that “Next Act” – when they sell the business.  And as I speak to Wealth Advisors, a common data point is that for the majority of Business Owners,  the business is often a major portion (80%+) of their portfolio.  So,  the retirement plan is:

1.     Run the business and invest in your 401K and

2.     Sell the business to fund retirement.

Yet – there is an Achille’s Heel to this plan.  

When asked how the value of the business was determined, advisors often say “The Owner told me the number”.   And when we dig a little deeper, that value the owner passes on is often not based on an outside valuation/estimate but on conventional wisdom, hearsay, their friend’s business, or a simple gut feel.  A full 80% of the Wealth Advisor’s planning is not based on objective data, but on a gut feel!  Unfortunately, if that gut feeling is wrong, it can be too late to correct it. 

Basic Exit Planning is a key to protecting against this threat and ensuring that plans are based on reality.  Several key facets of Exit Planning support sound wealth planning, including:

1.     Establishing business value through a 3rd party analysis through a formal valuation or estimate of value.  This gives an objective number for planning.

2.     Assessment of business quality – giving an objective sense of whether the business is sellable.

3.     Plan for value creation – if there is a value deficiency, exit planning focuses on enhancing business value, including correcting weaknesses and planning for growth.

4.     Clarification of Exit Options allowing an owner to understand and choose an optimal exit path that maximizes the ability to meet financial and non-financial goals

5.     Coordination with Wealth Advisor, Tax Advisors, and other professionals to develop tax-efficient strategies for wealth planning, as well as plans to accrue wealth prior to sale.

6.     And perhaps most importantly, clarity of the reality of the situation.  If the news is bad, at least it isn’t a surprise and plans can be made accordingly.

We recommend:

1.     Team up with a wealth advisor who routinely works with business owners and understands your unique challenges.

2.     Establish the value of your business with a 3rd party estimate of value/valuation.

3.     Consult an Exit Planner to understand your exit options.  

4.     Consult your CPA to understand the tax implications of those options.

5.     Work with your advisors to accrue wealth while you own the business. 

Invest 12-15 minutes today in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Wealth Management for Small Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business into your overall plan for managing your wealth.

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

• Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?

• Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.

• A financial needs and gap analysis with an accurate valuation (not back of the envelope - meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?

• Personal risk management including asset protection, insurance planning, tax planning.

• A current estate plan — a business owner cannot do exit planning without doing estate planning.

• A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.

• An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Contact us at email@ennislp.com for assistance in building sellable business value or planning your eventual exit. Please also consider investing 15 minutes in completing our FREE Exit Readiness Assessment. We do not ask for confidential information.