Tag: business owner

Business Owners Often Neglect Their Own Finances

Entrepreneurs spend a lot of time figuring out how to succeed in business. But when it comes to their own personal financial situations, they tend to let things go.

… a new survey of business owners … concludes. Nearly half of poll respondents — 667 owners of firms with revenue of $5 million or less — say they lack a personal financial plan. Furthermore, about a quarter of participants who built a company from the ground up plan to fund their retirement by closing their business.

However, the survey also found that some of the business owners would not have enough to cover their retirement needs.

Owning a small business involves much more risk than business owners often realize. It’s like planning for your retirement by owning a single stock. What happens to the retirement plan if the stock drops?  The same thing happens if a small business falls on hard times.  It’s called putting all your eggs in one basket.  Unfortunately lots of things can go wrong, and many of them are outside of the business owner’s control.

Small business owners need to realize that depending on the business to provide for their retirement income needs is too uncertain.  They should think of themselves as employees who need to plan for their eventual retirement independent of their business. That way, if the business succeeds they can walk away with even more money.   And if it does not, their basic retirement plans are secure.

Family Business Financial Planning

A family business is one of the ways that individuals build something of value for themselves and their family. Suffolk is a great example of a community where family owned restaurants, hardware stores, gift shops, bike shops, jewelry, sporting goods, clothing and furniture stores line the streets. Suffolk has its national chains, but its most recognizable businesses – in the pork and peanut industry – began as family businesses.

These family shops often provide a comfortable living as well as job opportunities for family members of the founders. Whether they stay small and local or grow into large businesses, there are challenges that everyone running a business has to face.

The first is competition. For every business there is a better financed competitor. The supermarket doomed the family-run grocery store. Wal Mart is a feared competitor for anyone selling groceries, clothing, furniture, electronics, toys, eyeglasses; and now it’s even getting into banking.

The second challenge is a bad economy. Many communities have seen their downtowns shuttered when local industry left. The businesses depending on housing have still not fully recovered from the crash of 2008.

Finally, most small businesses are very dependent on one or a few key people. If the children don’t want to get into the business when the parents are ready to retire, the business often closes. There is no guarantee that a business can be sold when they owner is ready to retire. Unless the owner has prepared for this, the financial results can be devastating.

For all these reasons, the family business owner has to make sure that they have prepared themselves financially for life after the business. Succession planning is critically important and should be part of the business plan from the moment the business is started. If a business is a partnership, buy-sell agreements should be in place to avoid complications from the death of a partner. If a business is going to be passed along to children, the owners should be clear about the division of assets. Otherwise there is likely to be wrangling – or even lawsuits – over who is entitled to what.

Most people in business choose to convert from individual proprietorships to limited liability companies. This protects the business owners’ personal assets in case of a lawsuit against the business. Some convert to “Chapter C” corporations for tax purposes. If a company wants to grow even larger, it may want to raise cash by “going public” and selling shares to the general public.

One of the most common mistakes that business owners make is to invest too much of their money in the business. It’s a fact that a family business is a high-risk enterprise. Competition, the economy – even a change in traffic patterns – can bring a business to its knees. Building an investment portfolio should go hand-in-hand with building a business. When most of your money is tied up in your business you are making the same mistake as the investor who owns only one stock. Diversification reduces risk and provides a safety net. Factors that are out of your control could end up severely damaging your business value, thereby crippling your total savings and your future goals and ambitions.

In addition to the traditional savings and investment accounts, the tax code provides many ways for business owners to put money aside in a variety of tax-deferred accounts such as SEP-IRAs, 401(k) plans, and SIMPLE-IRA plans. As a business owner you can even set up a “Defined Benefit Plan” which works much like a traditional pension.

There are a great many things that running a business entails beyond offering customers a great product or service. People who start a business are usually focused on this aspect of the business. But to insure that the business – and the family – survives and thrives, business owners should seek the assistance and guidance of a team consisting of an attorney, an accountant and a financial planner. They may be in the background, but they are critical for the financial success of the family business.

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Korving & Company, Investment Management, Suffolk, VA

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