Will Your Business Be Enough to Fund Your Retirement?

As an entrepreneur, you poured your heart and soul into building a successful business. Keeping it that way is usually your priority. But this single-minded focus often has a downside: it’s easy to forget about your personal financial situation apart from the business.

That dependency on your business leaves you vulnerable if something unexpected happens. We had a preview of that with COVID-19, when many small business owners were blindsided by this massive unforeseen event. Without a significant personal financial cushion to fall back on, many found themselves going from comfortable to suddenly struggling financially.

That’s why you need to get your personal financial situation in order, separate from your business.  But the reality is that many entrepreneurs don’t take the time to do that.

If that’s you, you’re not alone. According to one study, 78% of small business owners surveyed said they were depending on the sale of their business to fully fund their retirement.1

Many business owners assume that when they are ready, potential buyers will appear. Unfortunately, it’s not usually that easy, to put it mildly. One U.S. Chamber of Commerce study found that only one in five businesses that attempt to sell do so successfully, and those that do don’t necessarily get the prices or terms they want.2

Clearly, those are not the type of odds to bet your future on.  That’s why you need to start preparing.

Declare Your Financial Independence

A successful business is a great start. But unless you can turn it into sustainable wealth, your work is not done yet.

Improving your business so it can be an attractive candidate for an outsider to run is one thing you should focus on.

The other critical element is building your own financial independence apart from your business. So if the business falters or fails, you will be okay. Let’s face it: none of us has a crystal ball. Just like COVID-19 came out of nowhere and caused significant harm, many elements in life are beyond our control.

You want to get to the place where no matter what happens to your business, your lifestyle will not be impacted.

How do you get there? You need to start treating your personal financial life with the same level of importance, due diligence, and priority as your business’s financial situation.

Prioritizing Your Personal Financial Life

To prepare, you need to start carving out regular time to work on your own financial situation. That means assessing your financial situation, analyzing your options, and starting to work toward a better future. Yes, that requires a lot of time, which you probably don’t have. That’s why hiring a financial advisor who is experienced in helping business owners is a smart strategy.

A good financial advisor can help you clarify your goals for your personal finances (along with your business, if needed). Once you’ve set new goals, a quality advisor will help you stay accountable too.  With your busy schedule, that can mean the difference between paying lip service to this goal and actually achieving it.

But even if you do it yourself, don’t short-change your future! Start now, so you have the best chance of being prepared.

Here are some action steps to get started:

  1. Start with financial planning. Just as you plan for your business, you need a planning process that helps you eliminate blind spots and improve in areas where you’re vulnerable. The first step is clarifying what you want. Next, the plan should include analysis and strategy on exactly how you will achieve your goals. Ideally, it should break the process down into an action plan: things you need to do every month, every year, etc., so you can stay on track to achieving financial independence.
  2. Start diversifying away from your business and industry. It may seem counterintuitive, but once your plan is in place, you’ll likely need to start investing outside the industry you know so well. Why? We can’t see the future, so we can’t necessarily predict when a downturn or event (such as COVID-19) will impact your field. Business owners tend to invest in what they know. But if you’re in the technology business, for example, investing in more tech companies can make you extremely vulnerable to tech downturns. Instead, you will likely be advised to start diversifying so you have a mix of assets. When some assets drop in value, others are usually rising, so your annual returns can be less bumpy….and more consistent.
  3. Put the right protections in place. Natural disasters, accidents, and health problems can change your life, and they don’t usually come with advance notice. That’s why you need protection in place, so when a crisis happens, you’ll have some protection to shield you from a full financial catastrophe. Protection can include insurance for you and your business, asset protection, and other types of strategies. The key is you need to put these protections in place sooner rather than later, before anything occurs.  It’s usually smart to make sure the financial advisor you choose can help you with these needs, since it’s usually easier and more efficient to implement them as part of a comprehensive financial plan.
  4. Manage your money with discipline, not emotion. Financial planning and good advice can also help you avoid expensive money mistakes, whether it’s selling stocks after the market plunges (only to watch stocks recover without you, or buying the new car or boat on a whim without thinking through the costs. It takes work, but using discipline in your financial life is usually a requirement to building wealth that lasts.

Sounds easy, but of course, it is not. With the pressures of business and family, it can be hard to stay on track. That’s where having a high-quality advisor that you’re comfortable with on your side can help. They are there to keep you moving forward and accountable to your own goals.

But beware, not all financial advisors are alike. Here are some tips to help you find someone who can help you achieve your goals.

  • Demand experience. Wealth management is not simple. With a cyclical market, less experienced advisors can fall into the same traps that many investors do, leaving you overinvested at the wrong time. Be sure to look for a firm that has been around more than just a decade or so. You want a firm and advisors that have helped clients succeed in all types of market climates.
  • Insist on the right expertise. Business owners like you often have complex financial lives. You need a firm that is used to that complexity, who can help you navigate the financial aspects of business growth, insurance, asset protection and estate planning.
  • Ideally, find a full-service firm that can help you with both your personal and business financial and insurance needs. If you don’t, the onus will be on you to coordinate the advice you receive from multiple professionals, which can cost you time and money. Additionally, you’ll often have to reconcile differing advice, which can be confusing and frustrating. Fortunately, there are some firms out there that provide both personal wealth management and business wealth planning, so you can get the best of both worlds.
  • Opt for independent firms, not product companies. If you work with a financial advisor who is simply a representative of a product company, you’ll likely end up getting recommendations, not true advice.  Instead, look for a firm that isn’t owned by a product company.  That way, they can identify your needs, then help you compare products so you can get a high-quality solution at a competitive price.

You’re looking to find a long-term partner, so take your time. Interview several advisors. Ask them these questions and request the answers in writing. If an advisor is not willing to put these answers in writing, which may be a valuable red flag that the firm is not as transparent as they should be.

Final Words of Advice

When you started your business, you had a reason:  change the world, change an industry, change your life.  Whatever your motivation, you’ve given it everything you have to help it thrive. Now is the time to make sure you take care of yourself, too.  And the sooner you start, the closer you’ll be to achieving financial independence, so you can choose your future instead of having it be decided for you.

Footnotes

  1. https://www.cnbc.com/2015/04/13/ew-small-biz-have-an-exit-plan.html
  2. Leonetti, J. (2008). Exiting your business, protecting your wealth. Hoboken, N.J.: John Wiley & Sons.

Liza Brown

Liza Brown is dedicated to serving clients of Potomac Financial Services as President and Investment Advisor. She is passionate about helping individuals, families and business owners achieve their financial goals by combining risk-managed investing with protection planning. She earned her Bachelor of Science in Business from Virginia Tech, where she majored in Finance and graduated Magna Cum Laude.

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