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
Retirement
For many business owners, their business is their primary retirement asset. After years of building a successful business, they often plan to sell it to fund their retirement. However, if the business is their only source of retirement income, they risk not achieving the value needed for a comfortable retirement.
Businesses can fail, lose value during economic downturns, or face challenges when the timing isn't right to sell. Additionally, the true value of a business is often tied to the talents and goodwill of the owner—who won’t be around to run it after retirement.
Just like any other retirement plan, business owners need to diversify their retirement strategy. There are several qualified and nonqualified retirement plans available to business owners, which can provide a stable foundation for their retirement income needs.
Business Succession
When a business partner passes away, the business loses a valuable asset, and the surviving partner faces both short-term and long-term challenges. One of the most significant concerns is whether the business can continue when the deceased partner's family members seek their rightful share of the business.
For the family of the deceased partner, the business interest is often their largest asset, and they will typically want to be compensated for their share—either through a buyout or by becoming active participants in the business.
If the surviving partner lacks the capital to compensate the family, their options can be limited and unattractive. A well-crafted business succession plan ensures the orderly transfer of business interests from the deceased partner’s family to the business, providing stability during a difficult transition.
Key Employee Protection
The loss of a key employee can be one of the most devastating events for a small business. These individuals often bring specialized talents essential to the company’s success. Losing such an employee can cause significant setbacks and incur substantial costs as the business owner searches for a replacement—if one can be found at all.
Just as we insure our homes, income, and cars against unexpected loss, business owners should also insure their most valuable business assets, including key employees. Without protection, the loss of a crucial employee could put the business at risk.
Purchasing life insurance coverage for key employees is a smart business strategy. The coverage should be sufficient to cover recruitment and replacement costs, loss of earnings, stock redemption, or salary continuation for the employee's surviving family.
Executive Compensation
In a small business, it can take years to find or develop the executive talent needed to drive growth. Since top executives are hard to come by, losing them to new opportunities can be detrimental to the business.
Offering a competitive, structured incentive package encourages key executives to stay and invest their talents in a company that values and rewards their contributions. Well-designed incentive plans can help retain top talent while motivating them to perform at their best.
Plans like Nonqualified Deferred Compensation, Executive Bonus, and Split Dollar Life Insurance provide life insurance-based solutions that allow businesses to offer both current and future benefits to key executives in exchange for their continued service over a specified period.
