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In this series Empirical advisors answer common questions about financial planning and investing as an individual. If you have a question for our advisors, please leave your name and question in the comment section at the bottom of this article.

What type of planning can I do today to be even more successful down the road when I transition or sell my business?

Business owners face a unique set of challenges as investors.  Often times a large portion of their wealth is tied up in their business and they face complicated succession planning issues that need to be addressed.  In addition, they may not have much time to manage their investments if they are spending the majority of their free time working on their business.

While we do not receive the question enough, business owners should be asking, “What type of planning can I do today to be even more successful down the road when I transition or sell my business?”

The answer to this question boils down to four key areas:

  1. Diversifying from your business
  2. Coordinating your advisors
  3. Developing a succession plan before you need it
  4. Insuring the right risks for the correct amount

Diversifying from your business

You’ve heard the phrase, “Don’t put all your eggs in one basket.”  The basis for this expression is that there are many scenarios in which your eggs could break and you could be left with nothing.  The same logic applies to your investment portfolio.  Without proper diversification, it is possible to lose most or even all of your invested assets, including your business itself.  We understand the business is your baby – chances are you have built it from the ground up.  Now it is time to protect what you have built.

Investing in publicly traded securities can seem daunting, particularly because you do not have the same level of control that you do with your business.  You have more confidence in your industry and in your business to deliver returns.  We have confidence in you too, but there are a multitude of factors outside of your control that could damage your business.  We strive to work with business owners in developing a plan to invest assets across all industries, market sectors, and geographic locations. It is critical to take the necessary steps to protect you and your wealth.

Coordinating your advisors

Business owners can benefit more from planning than most people.  Since businesses can be structured in different ways, it is vital that your financial advisor, lawyer, accountant, and insurance professionals are all coordinating their efforts on your behalf.  If your professional advisors are operating independently of each other, their efforts might inadvertently be doing something that hinders your plan.  From taxes to insurance coverage to portfolio management, all of your advisors should be talking with you as a group to effectively strategize the best way to accomplish your objectives.  Investments are not done independent of other forms of financial planning, but instead should be an integrated part of your wealth management strategy.

Developing a succession plan before you need it

In our experience, succession planning is the area that is most often neglected by business owners.  This involves more than simply thinking about what you want to happen to your business when you retire, it is important to proactively draft a strategy with a team of experts.

We ask business owners to consider the following questions: What do you want to happen to your business when you are not around?  You can’t be involved forever.  How do you want your business to continue growing?  Deciding if you want to sell it to another business owner, transition it to employees or family members, or gift it to someone are difficult decisions to make, but they are necessary.

Would you be happy today if your business failed?  Not having a succession plan in place puts your business at risk during transition.

Insuring the right risks for the correct amount

This key component, like many of the others previously mentioned, come down to the “what ifs” in life. What if something were to happen to you?  What if you were unable to work anymore?  What if a key partner of yours was disabled?  Could your business still thrive?

You and your family are likely to depend on the income from your business.  If something happened that caused your income to decrease, do you have insurance to protect it? Many people consider themselves to be healthy and not at risk of suffering any kind of serious setback, but insurance is specifically intended to protect against those events that seem unlikely to occur.  We cannot dismiss the unlikely as impossible, but this is often how we treat these situations, whether consciously or unconsciously.  We fail to take the necessary precautions as a result of discounting the fact that death or disability are rare occurrences in our own situation.  In fact, 20 year-olds entering the work force today have a 25% chance of becoming temporarily or permanently disabled before they retire.1

By working with the right advisors, you can discover the types of risk that should be considered a priority.  They can help you uncover how to go about insuring against these risks and for what amount.  It is an extra layer of protection to keep your business running in those “what if” circumstances.

Your business is important to you.  We want it to be as successful as possible under any scenario that may occur.  When we receive questions from business owners, we uncover the risks that can affect both their personal financial situation as well as that of their business.

If you have questions about the risks you face in your business, call an Empirical advisor.  We would be happy to discuss the planning opportunities surrounding your business.

References
1. U.S. Social Security Administration, Fact Sheet February 7, 2013

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About Jack Monteith

Jack is a Certified Public Accountant and holds the Certified Financial Planner designation. He is the President and co-founder of Empirical Wealth Management.

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