Tag: Small business

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.

Retirement Issues for Small Business Owners

Small business owners facing retirement have issues that corporate employees don’t have. Most can’t simply announce their decision to retire and walk away.

Most small business people have a large part of their net worth tied up in the business. They often assume that they will be able to realize the value of their business to fund their retirement.

There are several problems with this. The first problem is that the value of a small business is very dependent on the economy. For example, a business tied to the construction industry that may have been worth $10 million at the peak of the cycle may be worth only a fraction of that once the economy turned down. The second problem is that the business owner may have an exaggerated idea of the value of his business and its worth when he’s no longer around.

Small businesses often depend on the owner to generate business. In business it’s often personal relationships that generate new and repeat customers. If the owner retires and leaves, the business frequently dies. For that reason, many buyers of small businesses require the previous owner to continue working for a number of years during a transition.

This means is that succession planning is vital to the financial well-being of the small business owner.

Of course, the ideal answer for small business owners is to have their retirement assets outside of their business. Business valuations, economic cycles, and succession planning remain important to the small business owner. But having a fully funded retirement portfolio makes retirement for the small business owner more certain and a lot less stressful.

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