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 new products or services. In addition they must manage their employees, develop and cultivate clients, all the while increasing their profitability.
Often times business owners are too absorbed in their business to tend to their own financial needs. See cobbler with no shoes. They may also overlook key planning considerations that could help their business grow and prosper. Additionally, the livelihood of a business owner can be imperiled when unexpected events occur that adversely affect the bottom line.
Business Owner Needs
For many business owners, their business is their primary retirement asset. After many years of building a successful business many expect to convert it to an income for retirement by selling. 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. Often 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 retirement.
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 non-qualified retirement plan options that can provide an additional 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 continue when the deceased partner’s family members show up for their surviving interest in the business.
For the families of these business partners, the business interest can often be their biggest asset after they become the rightful owner of that asset at the time of death.
If the surviving partner does not have the capital to compensate the family for their share, options are often limited and unattractive. A well thought-out written business succession plan can provide for the orderly transfer of the key 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. The loss of such a valuable individual could set the business back for a significant period of time, 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 our most valuable assets – our home, automobiles as well as our ability to earn income – should be insured against an unexpected loss. It should be no different for business owners as the loss of a valuable business asset could spell disaster.
Buying life insurance1 coverage on key employees makes good business sense. The amount of coverage should be enough to cover the costs of recruiting and paying for a replacement, loss of earnings to the company, and 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 and develop the executive talent needed to build a business to the next level. Executive talent is unique and it is even more difficult on the business when it walks out the door in pursuit of another competitive 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.
Non-qualified Deferred Compensation, Executive Bonus, and Split Dollar Life Insurance1 are all incentive-based plans that enable businesses to offer current and future benefits for a specified period of time, to their key employees for their continued loyal service to the company.
For more information on Business Owner Planning, please contact us today.
1) Disclosure: Clients should be aware that the insurance may pay a commission or other compensation and involve a conflict of interest, as commissionable products conflict with the fiduciary duties of a registered investment adviser. NWP always acts in the best interest of the client, including the affiliated sale of commissionable products to advisory clients. Clients are in no way required to utilize the services of any representative of NWP in connection with such individual's insurance activities outside of NWP.