Business owners and operators lead complex and demanding lives while being exposed to a broad array of risk.

The unrelenting demands of business require operators to wear many hats and log substantial work hours with little time left for personal finances.
Meanwhile, gaps in their knowledge of basic principles of estate planning, asset protection and risk management pose both a challenge and an opportunity for multifaceted financial professionals.

A business owner’s challenge often comes from an intermingling of both business and the personal. Every bet business owners make on their businesses can have profound consequences for their personal finances. This is where the right financial advisor can make all the difference.

All too often, as an advisor targeting C-suite executives, I have seen business owners and operators disadvantage themselves. These are some of the recurring challenges and issues I have witnessed:

They Underestimate Their Personal Exposure To Business Risk. The risks in operating a business are constant and changing. Most operators fail to fully appreciate their exposure to risk and the need to proactively establish protective barriers to their personal assets. This is particularly challenging since most banks require personal guarantees on commercial loans. Property and casualty insurance can’t protect against liquidity risk or a “black swan event.” In an ever-accelerating cycle of progress and obsolescence, emerging disruptive technology and product obsolescence, a company’s niche has become increasingly vulnerable, and the days of secure franchises and long-term business client relations are waning.

They Double Down On Market Risk. When business owners realize extra income, they often reinvest in what they know. For example, I have seen construction CEOs take excess cash out of their businesses only to buy real estate or speculate in distressed housing, effectively doubling down on cyclical construction and real estate (which come with inherent liquidity challenges). People tend to invest in what they know, and that familiarity creates blinders to alternatives. From a macroeconomic perspective, maybe they should consider investing in countercyclical assets that offer greater liquidity.

They Loot Their Retirement Funds To Save Their Businesses. All businesses are vulnerable to economic cycles and will invariably find themselves in a negative carry at some point. The difficulty lies in determining how long it will last. Typically, operators tend to be overly optimistic about an economic turnaround and wait too long to pare down their overhead during economic slowdowns.

Many operators also fail to appreciate the importance of categorizing and segregating special purpose funds. If a business is failing, it makes no sense to delay that outcome by draining one’s retirement fund. Especially when federal and state laws provide special protection to individual retirement funds such as 401(k)s, IRAs and annuity holdings, including whole or partial protection from court judgment and seizures.

They Focus On Control. Business owners have a tendency to covet control at the expense of all other options, when in reality it’s advisable to surround their businesses with experts who can facilitate results and help the businesses overcome barriers. Not only can these individuals help remove obstacles that could potentially hamper the business, but they could be a source of much-needed capital during a crisis.

In the past, private equity firms had no interest in making minority investments. However, since the recession, there has been an expansion of private equity funds. Competition has resulted in some private equity funds willing to consider taking non-controlling stakes in businesses. Assuming a company can meet a fund’s scale and market niche requirements, this could be a viable option for private companies to raise new capital. Private equity groups prefer businesses with recurring revenue streams, established profits and capable management teams. The diversity of private equity groups is such that companies of almost any size, sector or structure may be suitable as investments.

Business Owners Often Fail To Consult With Financial Professionals To Gain A Broader Perspective. Some private business owners are so caught up in managing their businesses that they tend to be oblivious to changes in the economy. For example, some bought businesses just before the economic collapse, while others failed to fully appreciate the depths of economic weakness, so they were overly optimistic about the economy’s speed of recovery.

Alternatively, business owners that do consult with financial specialists all too often tend to compartmentalize their interaction, keeping those discussions in separate silos, without realizing the importance of establishing a vetting process among their advisors.

Business Owners Often Do Not Regard Taxes, Succession And Estate Planning, Which Are Especially Important Issues Now To Baby Boomers. Aging boomers will trigger a generational transfer of wealth on a considerable scale. Economist and demographic expert Robert Avery predicts that boomers will transfer $10 trillion to heirs—the largest generational transfer of wealth in the history of mankind. The vast majority of this wealth is held as stock in more than 12 million privately owned businesses. During the next 10 to 15 years, more than 70% of these companies are expected to change hands, creating tax, succession and estate planning challenges.

Business Owners Often Lack Awareness About Special Benefits. Owners and self-employed individuals have access to tax-deferred saving opportunities not typically available to the average employee. Specifically, they can adopt and fund retirement plans that, in many cases, offer additional opportunities to put money into deferred retirement accounts over and above what is possible under a 401(k) plan or a simplified employee pension (SEP) plan. There are also advanced tax-advantaged programs that use life insurance products.

It’s not enough to simply run a profitable business and secure adequate retirement funding. In the event of a catastrophe, a business owner typically is the only hope for rescuing his or her business—the only one with the conviction, confidence and management experience. By working with a financial advisor, an owner can establish a plan to rescue the business if there is a foreclosure or bankruptcy or some kind of black swan event. It should be a team approach.
The owner can focus on the business while the advisor helps segregate and protect the owner’s personal finances, aids in the building up of the owner’s retirement and backs up funds.



Peter Klein, CFA, is principal at Secor Advisor Group.