For many business owners, the business represents their largest asset. The Exit Planning Institute reports that a business makes up, on average, 80% of an owner’s net worth. With that much wealth tied to one company, your business plan and your personal financial plan can start to depend on each other.
We believe comprehensive wealth management for business owners can be most useful when it starts early and evolves with the company. Below, we walk through planning considerations at three stages: starting out, growing, and exiting.
Starting Out: Laying the Groundwork
In the early years, you may pour your savings, resources, and energy into the business, with less time to dedicate to personal financial planning. A few early decisions, though, can shape your options for decades.
At this stage, financial planning for business owners might include:
- Entity structure and taxes. The structure you choose can affect how you pay yourself, how the IRS taxes your income, and which exit paths stay open later. Your CPA, attorney, and financial advisor can help you weigh your options.
- A personal safety net. Keeping personal and business finances separate, and maintaining personal reserves, may help protect your household if revenue dips.
- Protection. Life and disability insurance, along with asset protection strategies, can help reduce some of the risks that come with business ownership.
- Retirement savings. A company retirement plan may offer tax advantages and can help you start building wealth outside the business.
Growth: Diversifying and Protecting What You’ve Built
As revenue grows, complexity can grow right along with it as income increases, services expand, and employees join the business.
Growth can also overshadow exit planning, as you may be focused on what the business needs now rather than what you might need down the road.
During the growth phase, financial planning strategies for business owners can include:
- Diversifying beyond the business. Taking distributions and investing them outside the company may reduce your reliance on a single asset. A portfolio designed around your goals can work alongside the business.
- Tax minimization. Higher income can open the door to planning around compensation, retirement contributions, and charitable giving.
- Shareholder alignment. A clear buy-sell agreement can help partners agree, in advance, on what happens if an owner leaves, becomes disabled, or dies.
- Estate planning. Wills, trusts, and beneficiary designations can help keep the business running and your family protected.
Exiting: Preparing Before the Deal
Every exit is different. You might sell to a third party, pass the business to family, sell to management, or transfer ownership to employees. Each path comes with its own tax, legal, and personal implications.
Timing can also shape your outcome; the Exit Planning Institute suggests that carrying out an exit strategy can take three to five years.
For entrepreneurs approaching an exit, wealth planning can include:
- Valuation. Knowing what your business is worth can help you measure the gap between your current net worth and the wealth you hope to have after the sale.
- Pre-transaction tax planning. Some strategies, including certain charitable approaches to a liquidity event, may work only if you put them in place before the deal closes.
- Post-transaction planning. Proceeds from a sale can replace the income your business once provided. A plan for investing, spending, and giving that money can help support your goals for years to come.
- Life after the business. Your role, your schedule, and your identity may change; it can be valuable to understand what you want that to look like before the transaction happens.
One Plan for Your Business and Your Life
Your business has a CFO. We believe you deserve one too.
Our SignatureENTREPRENEURTM team works with business owners to build a Grow, Protect, Give, and Live blueprint for their company and their family, which may include portfolio design, tax strategies, asset protection, succession and business transition planning, and pre- and post-transaction planning.
Whether you just opened your doors or you’re weighing an offer, high-net-worth business owner financial planning can help connect what you’ve built with the life you want. Schedule a call to start the conversation.
