Planning for Business Owners
Growing a business is a difficult undertaking today as business owners must confront a myriad of tax laws and regulations while trying to effectively create products or services, manage their employees, develop and cultivate clients, and do so profitably.
Often times 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. Also, the livelihood of a business owner can be imperilled when unexpected events occur that adversely affect the bottom line of the business.
Business Owner Needs
For many business owners, their business is their primary retirement asset. After many years of building a successful business they expect to convert it to an income for retirement by selling it. 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 the needed income.
Businesses can fail. Businesses can lose value in certain economic cycles. The timing is not always right to sell a business. Many times the true value of the business lies in the talents and good will of the business owner who won’t be around to run the business after he retires.
Business owners today must prepare for retirement with the same level of diversification recommended for any retirement plan. Business owners have access to a number of 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. The long term issue for surviving business owners is whether the business can survive when the partner’s family members show up for their interest in the business.
For the families of business partners, 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 in the business.
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. Often times it’s a key employee who 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, and at tremendous cost, while the business owner seeks to find a replacement, if one can be found at all.
In financial planning, we are taught that it 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 good business sense. 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 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 build the business to the next level. Executive talent is hard to come by, and it is even more difficult on the business 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.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.