5 Key Questions from Privately-Held Business Owners with Mark Newfield

Many of my clients are entrepreneurs who often ask specific questions during the planning process. Whenever I hear one of these questions, I usually respond with, "What are you trying to accomplish?" and "Why is money important to you?" Understanding these answers is crucial to developing a sound financial plan tailored to their unique goals and needs. In this article, I'll address five key questions that can help entrepreneurs optimize their financial strategies and secure their business's future.

1. How do I optimize my personal retirement savings?

The first thing to understand is how much you need to save to achieve your desired results. Then, determine the core outcome of the plan: Is it to benefit primarily you, or also your employees and partners? Once we have that answer, we can explore your options, such as pension plans that provide a guaranteed income stream rather than just a tax-favored investment account. Some tax-qualified plans to consider are IRAs, Roth IRAs, SEP IRAs, Simple IRAs, or 401(k)s. For a more traditional pension plan, or if there is significant, predictable cash flow, a large savings need, and an opportunity for a substantial tax deduction, we often implement Cash Balance plans.

As we narrow down the plan options, consider the current free cash flow of your business. Is it consistent, or does it vary year to year? Is it growing? The business structure is also important. Do you have multiple businesses or business units with different legal structures? These factors are crucial when making the best decisions for your business.

2. How do I develop benefits and savings plans for my employees?

Similar to the first question, whom do you need to benefit? Are you having trouble attracting or retaining critical people? Consider the demographics and geography of your workforce. Additionally, think about how much you can afford to spend on benefits and your mindset: do you prefer offering a rich set of benefits, or do you aim to provide the minimum? Typically, most businesses start with a retirement plan, then offer health insurance, and later add additional benefits based on their demographics. Various options exist for purchasing and managing benefits, with better pricing usually available once a company reaches around 50 employees. Most of our clients use a benefits broker rather than procuring benefits themselves. However, at a certain size and cash flow, you may want to consider a self-insurance arrangement.

3. How and when do I develop an exit strategy? 

The most successful exits, barring a fabulously successful startup, occur when the partners start planning about 10 years before the anticipated exit. We recommend involving your attorney, tax advisor, and financial advisor in the planning process. Often, a broker or investment banker who knows both your business and market is also involved. Fundamentally, the earlier you start thinking about it, the better the process tends to work. In the end, you have many options, such as a sale or gift to a family member, a slow wind down, a sale to an outside entity, an ESOP, or a sale to key employees. Typically, this is a large component of your financial security, independence, and family wealth plan. Therefore, having a sound financial plan that determines what you need to take out, after taxes and transaction costs, is crucial.

4. What can I do to minimize risks and protect my business? 

When it comes to minimizing risk and protecting your business, you should have a plan in place for these key questions:

• Who would run my business if I am unable to do so?
• Can the business sustain my income and continue operations without me?
• Would my employees, especially the key ones, stay if I am no longer running the business?

Statistically, the most common issue is an illness or injury that limits or eliminates your ability to work (source: Council of Disability Awareness). However, you should also consider what would happen to the business if you were to die prematurely. Additionally, you should have a disaster recovery plan for your property, plant, equipment, and ongoing operations. Over the past few years, we have seen numerous examples of external forces causing shutdowns.

The most secure clients have a combination of planning and insurance coverages. Every business should have property and casualty coverage as well as a documented disaster recovery plan. As part of your plan, you should have a Buy/Sell Agreement with a partner and some form of disability coverage for yourself and/or key employees. While risks cannot be completely eliminated, they can be mitigated. Given the events of the past few years, I suspect most businesses will retain more cash reserves, which is beneficial as long as a sufficient level of business investment is maintained.

5. How do I go about getting a liquidity event?

First, I like to understand what you need to take out of your business to accomplish your objective. After all, once you’ve won the game, you can stop playing if you choose (and most people would be well-advised to take enough off the table to be able to stop playing, even if they are not quite ready to do so). Make sure you understand your market and its current cycle. Is there a lot of M&A activity right now? Why? Are sale prices high or low? Network in your market. You may find a potential partner or acquisitive enterprise. Get to know the brokers and investment bankers in your space so they think of you when an opportunity arises. The most attractive candidates are well-run businesses with growing cash flows in a market with longevity. A professional appraisal, executed periodically, is a good idea. Most business owners either under or (more often, in my opinion) over-value their business. It is, after all, your creation. Emotional attachment often gets in the way of objectivity.

Conclusion

Navigating the complexities of financial planning, retirement savings, employee benefits, exit strategies, risk management, and liquidity events can be challenging for entrepreneurs. By addressing these five key questions, you can better prepare your business for long-term success and stability. Remember, the earlier you start planning and seeking advice from professionals, the more secure your financial future will be. Consult with your attorney, tax advisor, and financial advisor to tailor these strategies to your unique situation and ensure your business thrives for years to come.