I am a small business owner, so I understand that this is a week to celebrate with many of my clients who are also entrepreneurs. My clients and I know the joy and challenges of making sure employees are happy. We know the big picture and the minutia that goes into setting up retirement plans. We understand the incredible cost and the satisfaction of providing employees with health insurance. We also know that entrepreneurs are pulled in multiple directions by multiple people all day every day.
Unfortunately, I also recognize how easy it is for a client to become enthralled with building the business, and then overlook some of the necessary strategies that should be put in place personally and professionally to make sure that the success continues. My hardest job as the financial planner for entrepreneurs is trying to get them to focus for long enough that they will thoughtfully map out and implement a plan.
To put National Small Businesses week in perspective, consider these facts:
- There are approximately 30,000,000 small businesses in the US. These may be one person companies or employer firms. (Small Business Administration, 2018)
- Firms with less than 500 employees accounted for 99.7% of employer firms. Firms with fewer than 20 workers make up nearly 90% of companies. (US Census Bureau, 2014)
- Only about half of all new businesses survive 5 years, and about one-third survive 10 years. (Bureau of Labor Statistics, 2016)
Small businesses are a major part of our economy, and are owned by people who are bold and full of conviction. Entrepreneurs are some of the most interesting clients that my team works with because of their competing goals, risk levels, and focus on their business. And as their financial advisor, I believe that the following six issues are the biggest challenges that our clients face while also trying to focus their efforts on building and growing their businesses.
RETIREMENT PLANS
The different types of retirement plans available to small business owners reflect the wide variety of businesses that exist in our country. Each business is unique, and it is essential to match clients with the ideal plan, in a way that incentivizes both employees and employers to maximize the benefits of the plan. Depending on income level and number of employees, a self-employed person can contribute to an IRA, Roth IRA, SIMPLE, SEP, 401(k), or Defined Benefit Plan. For more detail on the kinds of plans that small business owners can consider, read one of our previous articles.
DOCUMENTS
Other than financial planners and estate attorneys, no one loves to work on estate and company formation documents. But the important details in your estate plan – namely, “what happens to my stuff?” – are amplified for business owners. At formation, business owners are smart to spend time drafting clear business structure documents outlining ownership, ‘what if?’ scenarios, and buy-sell agreements for the future.
Often overlooked, however, is the reality that the business is likely to be the largest asset that an entrepreneur owns, so it’s equally important to plan for what happens to the business if they die while owning it. Many entrepreneurs have a goal to sell their business, but what if that’s not how events unfold? A plan should always be in place for your beneficiaries to be able to realize success as part of your legacy.
HYPER SUCCESS
Speaking of selling the company, what if you really do get the opportunity to execute THE transaction: the single liquidity event that changes your life? Are you ready for that? Would you be able to pull it off? Do you have the right systems in place in your operations to sell at the highest multiple? Do you have the right advisors to walk you through the transaction? If you are ever going to consider selling your business, take a few minutes NOW to imagine what your company would need to look like to sell it at a price that is reasonable to you. If your company doesn’t look like that now, the difference between that vision and how your company operates today is your to-do list.
RISK
If you do grow quickly or become very profitable, you are likely to run into lawsuits. These can stem from employees, customers, business partners, vendors who feel they have been wronged, or regulators who feel like they are right. Entrepreneurs take risks, but must also balance the risk in business and personal financial life. This balance may come from putting insurance plans in place to handle risk, choosing investments with a low risk profile, or simply increasing emergency cash reserves for family or business.
INSURANCE
Small business owners need the types of insurance that any every worker does - healthcare, disability, life, possibly long-term care – but also have the responsibility to provide these plans to their employees. Additionally, the risks involved in owning a company can often be mitigated or reduced through other insurance plans to address long-term business planning: buy-sell agreements, key man policies, E&O issues, and industry specific protection (such as automobile insurance for a company that owns a fleet of vehicles).
PHILANTHROPY
In today’s marketplace, employee engagement is a much-discussed key element of building a successful business. It helps to unify your workforce, instill company culture, and clarify to your customers who you are as a company. Whether you plan a volunteer event, specifically support a particular agency and its mission, or partner with a larger organization like Communities Foundation of Texas or United Way to orchestrate your employee engagement, serving the community that made you a success is a pivotal strategy in today’s market.
These challenges may seem nearly insurmountable. But again, this is what small business owners do, and why they deserve this week of celebration. As a financial planner who helps shepherd small business owners through many of these issues, I salute each entrepreneur for and all you do for customers, employees, and the American economy.