Today, growing a business is a difficult undertaking as business owners are confronted with a myriad of tax laws and regulations while trying to profitably create products or services, manage their employees, and, develop and cultivate clients.
Often business owners are too absorbed in their business to tend to their own financial needs, and they may also overlook key planning considerations that could help their business grow and prosper. The livelihood of a business owner can also be imperiled when unexpected events occur that adversely affect the bottom line of the business.
Business Owner Needs
For many business owners, their primary retirement asset is their business. After many years of building a successful enterprise, many expect to convert it into an income for retirement by selling. If they are relying upon the business as their sole means of retirement they run the risk that it may not attain the value needed to produce an adequate income.
Businesses can fail and lose value in certain economic cycles. The timing is not always right to sell. Many times, the true value of the business lies in the talents and good will of the owner who won’t be around to run the business after he/she retires.
Business owners today must prepare for retirement with the same level of diversification recommended for any one retirement planning. Business owners have access to numerous qualified and nonqualified retirement plan options that can provide a cornerstone for their retirement income needs.
When a business partner dies, the business loses a valuable asset and could suffer in the short term. For surviving business owners, the longtime issue is whether the business can survive when the partner’s family members show up for their interest in the business.
For the families, the business interest is often their biggest asset and they become the rightful owner of that interest at the death of the partner. They will want to receive their share of the business, either in direct compensation or through their participation as an active partner.
If the surviving partner does not have the capital to compensate the family for their share, their options are limited and not very attractive. A business succession plan can provide for the orderly transfer of the business interest from the deceased’s family to the business.
Key Employee Protection
One of the more devastating events a small business can suffer is the loss of a key employee. A key employee brings a special talent to the business and is responsible for much of the success of the business owner. The loss of such a valuable asset could set the business back for a period of time, at tremendous cost, while the owner seeks to find a replacement, assuming one can be found at all.
In financial planning, we are taught that our most valuable assets – our home, our ability to earn income, our cars – should be insured against an unexpected loss. It’s no different for business owners as the loss of a valuable business asset could imperil the business.
Buying life insurance coverage on a key employee makes for a smart business decision. The amount of coverage should be enough to cover the costs of recruiting and paying a replacement, loss of earnings to the company, any redemption of stock and/or a salary continuation plan arrangement with the surviving family.
In a small business setting, it could take years to find or develop the executive talent needed to take the business to the next level. Executive talent is hard to come by, and, worse still, when it walks out the door in pursuit of another opportunity.
When key executives are presented with a strong monetary incentive package, they are more likely to stay and utilize their talents where they feel appreciated and appropriately rewarded. Structured incentive plans can help keep key executives in place and motivate them to higher levels of performance.
Plans such as Nonqualified Deferred Compensation, Executive Bonus, and Split Dollar Life Insurance are life insurance based plans that enable the business to offer current and future benefits to their key executives in exchange for their continued service for a specified period of time.
For more information on Business Owner Planning, please contact us today.