America's small-business owners are wealth builders, driving
GDP and job growth. But when it comes to their personal finances, they get low
marks in asset diversification and retirement planning. That's because the vast
majority of their invested wealth is tied up in their businesses, a tactic that
is shortchanging their personal financial futures. These findings were revealed
in the first CNBC/FPA Small Business and Financial Planning Survey.
The survey, conducted in conjunction with the Financial
Planning Association, sampled 178 financial advisors nationwide that service
small-business clients ages 35 to 70. According to the survey, 70 percent of
small-business owners' wealth is invested in their business, and only 30
percent outside their firms.
The most pressing financial challenge facing small-business
clients today is developing a retirement plan and exit strategy (42 percent).
That's followed by managing cash flow (23 percent), business tax issues (14
percent), health insurance (6 percent) and raising working capital (6 percent).
Other issues cited include growing revenues and succession planning.
Despite these concerns, less than one-third of
small-business clients worked with their advisor on a business plan, the
CNBC/FPA survey revealed. Of those that do, only 25 percent met with their
advisor to review their plan quarterly. Among
those that have retirement plans in place, the most popular vehicle among
small-business clients polled is profit sharing 401(k)s (54 percent).
Neglecting a personal financial investment strategy and just
plowing money into a business is fraught with risk. The CNBC/FPA survey highlighted that most
advisors servicing small-business owners had the same concern. Over half of the
respondents, 54 percent, felt their small-business owner clients did not have
enough protection against financial risks, and 19 percent were not sure.
Twenty-eight percent felt their clients were well protected.
The immediate risks involve the owner's disability or
premature death, which would leave the businesses subject to liquidation at
fire-sale prices, or possibly dissolution, leaving the owner's family with
little or nothing.
Crafting a grand exit
To mitigate risk for small-business owners, financial
advisors are using an array of insurance products, the survey showed.
Disability insurance was employed by 81 percent of respondents, followed by
liability insurance (73 percent), key man insurance (70 percent), health
insurance (63 percent), and business-interruption insurance (37 percent). Despite
this fact, 47 percent of FAs who took the survey noted that only up to 20
percent of their clients had any succession plan in place to ensure a smooth
management transition. According to the survey, 31 percent of small-business
owners say the biggest hurdle they must overcome when creating an exit strategy
is finding a buyer.
Financial advisors who participated in the CNBC/FPA survey
pointed to three key initiatives small-business owners and their financial
planners should follow in order to secure their financial future.
1. Diversify. Work
to reduce dependence on the eventual sale of the business to fund retirement.
Instead, strike a balance between reinvesting all profits in business expansion
and diverting some funds to other investment assets.
2. Prepare for the
worst. Protect your family and your business assets by buying
insurance that covers the business owner's disability or premature death.
3. Plan for
succession. The time for a business owner to start developing a
succession plan or exit strategy is from the first day the firm is launched.
That's because a well-designed strategy—including grooming the right
individuals for succession—may take years or decades to implement.
The good news is that there is usually a fallout benefit. Having
a smart exit strategy boosts the odds of a small business's long-term success,
since it guides the founder on how the business should be properly structured
and managed on a day-to-day basis.
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article on CNBC.