Due to the demands of running a business, one of the most precious commodities for small business owners is time. With a variety of obligations spanning legal, human resources, and business operations, the financial aspect of a small business may often be neglected by an owner simply without enough time.
This crunch for time presents an opportunity for financial advisors who can add substantial value for small business owners by providing advice and intelligence on finances outside the core business operations. The following are four areas financial advisors should focus on when catering to the needs of small business owners.
Key Takeaways
Working with small business owners can be far more complex than financial relationships focused only on portfolio management.Financial advisors can help navigate the types and levels of insurance each specific small business should have.Financial advisors can also help analyze, track, and make recommendations regarding the performance of the business. When it comes time to leave the company for a different opportunity or retirement, a financial advisor can assist with the transition. A financial advisor can also help oversee, protect, and grow lump-sum distributions from the exit of an ownership position through traditional financial management.
Insurance Planning
There's a variety of policy options for small business owners looking for protection and risk mitigation. General liability insurance coverage usually includes injury, customer property damage, or libel and slander lawsuits. If your clients are looking to sign a commercial lease, they may be required to have general liability coverage.
One of the most traumatic events for a business is the death of the owner, partner, or other key employees. In these instances, death or long-term disability can cause a variety of problems including business closure, temporary shutdown of operations, mandatory buyout of a part-owner’s heirs, or a sizeable tax assessment if the business is sold.
With the help of a financial advisor, these risks can be mitigated through a variety of specific policies including life, disability, and key person insurance. Many partnership agreements also call for the implementation of a buy-sell agreement that mandates life insurance policies purchased on all partners to buy out their ownership stake in the event of early death.
Due to the nature of certain businesses, financial advisors can help assess whether error and omissions insurance is worth it for a small business. These policies protect against negligence lawsuits or damages caused by work oversights. You can also help your client determine whether they need cyber liability coverage.
Managing the Financial Assets of the Business
As sales and profits grow, small business owners who don’t have the time for investment research often allow capital to build up in checking and low-returning accounts, earning little on their accumulated cash. Financial advisors can assist time-constrained small business owners in the efficient allocation of financial assets.
Part of the difficulty in managing the earnings of a small business is determining the future cashflow needs of the business. A financial advisor should work with the client to understand their company, what future aspirations are being planned, and what resources will be needed for company growth. While investing unused funds makes sense, locking money into illiquid vehicles or incurring capital losses puts future company development at risk.
Financial advisors can also help manage the cyclicity of operations to ensure the client will have sufficient cashflow year-round. For example, imagine a small wedding planning business with busier operations in summer months. When the small business is less busy in the winter, a financial advisor still needs to ensure the company has enough money on hand to survive the slower season and prosper during busier times.
Planning the Exit
All small business owners will eventually exit their businesses. Some eventually sell, while other transfer ownership to family members. Some business also end for financial reasons or due to the passing of the owner.
Selling or transferring ownership can prove to be a complex process requiring knowledge and experience with a wide range of factors including valuation of the business, effects of the sale on employee benefits, and taxes. Prior to and during a sale or transfer, a financial advisor can distill advice from experts in each facet of the transaction to develop a strategy that yields positive outcomes across all aspects of the owner’s exit.
Some businesses simply do not make enough money. If an owner is too emotionally tied-up with their small business, it is up to the owner's financial advisor to map out the financial situation and deliver hard-to-hear information. A company may have enough funds today, but financial advisors more in tune with the cashflow forecast and financial trends of the small company may be able to detect trouble before the owner.
While there are insurance coverage options available to alleviate some financial burden from the passing of an owner, the transfer of assets at the time of death is an incredibly complex and risky process. Mistreatment of estate assets may result in large tax assessments, and the legal process is often fraught with paperwork, deadlines, and requirements. For grieving family members that may need assistance, financial advisors can aid with this process.
Implementing Company Benefits
Many companies offer their clients 401(k) or similar defined-contribution retirement plans for their employees to participate in. Establishing and installing a plan in a company often comes with many reporting and management requirements, though your client can outsource much of the administrative burden. Financial advisors can oversee the retirement plan, provide consultation to all employees of the small company, and receive management fees.
Establishing employee retirement plans, as well as other benefits, is a great way for businesses to minimize turnover and retain valuable employees. Some small businesses may offer subsidized insurance coverage to its employees or simply award specific levels of disability insurance to all staff. A financial advisor can report on the cost of such benefits to the company as the small business owner weights the benefit of providing these perks.
Managing Post-Business Portfolio
After selling or transferring a small business, an ex-owner may have significant financial assets. At this point in the financial relationship, an advisor is likely to assume the more traditional role of managing investments, developing a plan for the ex-owner’s estate, and replacing income that was generated by the business.
Some small business owners leave their company because it's time to retire. In this case, a financial advisor is tasked with ensuring the stability and safeguarding of portfolio assets. This may also include succession planning, wealth transfer preparation, and strategizing about pulling Social Security.
If a small business owner leaves but is not yet ready to retire, they may require much more assistance from an advisor. A good financial advisor will begin by understanding what financial goals the client has and how can the resources obtained from the sale of the small business be used to achieve those goals. Sale proceeds from the disposition of their small business may be transferred into tax-advantage vehicles like IRAs or leveraged into riskier, growth-generating holdings.
How Can Financial Advisors Help Small Businesses?
Financial advisors can play an important part in helping small businesses form, grow, and close. Advisors are a great resource when deciding what level of insurance coverage you need, what benefits to extend to your clients, and what your future cash flow looks like. A financial advisor can also help with the transition away from your small business when you decide its time to sell or leave your company.
Should My Small Business Offer Retirement Benefits?
Whether or not your small business offers your employees retirement benefits depends on several factors. First, you will likely have to pay to have the plan implemented and monitored. Second, you must decide whether you want to match contributions and whether your company can afford to do so. Third, you must weigh the cost of managing retirement benefits with the level of interest within your employees.
What Insurance Coverage Does My Small Business Need?
Each small business is different, and the industry you operating within may call for higher or lower levels of insurance. In addition, each state has its own insurance requirements. If you're not sure what level and what type of coverage you need, a financial advisor can help determine what is best for your situation.
The Bottom Line
There's a lot that goes into starting and managing a small business. To alleviate some of the burden, small business owners can turn to their financial advisors to help manage business assets, implement insurance or company-wide benefits, and plan for life after the owner leaves the company.
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