This information is derived from Rehmann’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs.
If you’re like most business owners, your company is more than just a source of income. It’s the culmination of years of hard work, dedication, and vision. That’s why so many owners are inclined to pour most — or, sometimes even, all — of their financial resources into their business. It’s what they’ve put their heart and soul into building, and so, logically, it feels like, and often is, their most valuable asset.
However, when it comes to business transition and succession planning, investing all of your wealth into your business can be risky. As such, when you’re developing the plan for your eventual exit, it’s crucial to remind yourself that transition and succession planning isn’t just about finding the right buyer or passing the reins to the next generation. It’s also about ensuring your financial future, no matter what you decide — or hope to do — with your business when you exit.
The Risk of Putting All Your Eggs in One Basket
Let’s start by tackling that all-too-common obstacle that can impede a business owner’s future financial security — the temptation to treat your business as an indestructible asset — and why that approach can be so risky.
It’s easiest, I believe, to think about the risk this way: Would you invest all of your retirement savings into a single stock? Of course not. Doing so would leave you vulnerable to market fluctuations, industry downturns, and unforeseen challenges.
The same applies to your business. Over time, industries change, competitors emerge, and economic conditions fluctuate. Business transition and succession planning requires protecting yourself by building wealth both inside and outside of your business.
In this article, I’ll walk you through five key moves you can make to build wealth outside your business — none of which will hamper your ability to keep your business thriving, too.
Move No. 1: Start Early and Pay Yourself First
One key to a successful financial future is to broaden your concentration on growing your business and dedicate some of your time and effort to growing your savings. One of the simplest ways to do that is to pay yourself first.
Here’s why this works so well: By allocating a portion of your business income to personal investments, you’re creating a safety net that grows over time. Thanks to the magic of compounding interest, the earlier you begin saving and investing, the more exponential your financial growth.
For example, say you begin, at age 35, investing $500 a month into a retirement account. With an average annual return of 8 percent, that $500 monthly investment could result in over $587,000 by age 65. Starting just 10 years earlier could nearly double those numbers.
As you continue to invest in your business, don’t neglect investing in yourself. Your future self will thank you.
Move No. 2: Leverage Tax-Advantaged Accounts
One of the smartest ways to plan for your financial future is by taking full advantage of tax-advantaged accounts. These tools can help you reduce your taxable income, save on taxes, and build savings for specific goals. Here are some top accounts every business owner should consider funneling money into:
- Roth IRA: Offers tax-free withdrawals on qualified distributions, meaning you can retire without worrying about taxes on your nest egg.
- Employer Retirement Plans: Your employees aren’t the only ones who benefit when you offer a retirement plan option, such as a SIMPLE IRA, SEP IRA, 401k, Roth 401k, and/or cash balance plan. Maximizing your tax-deductible or tax-deferred contributions in one of these plans can not only boost your personal retirement savings but also reduce your taxable income, freeing up more capital for reinvestment in your business or other personal savings or investments.
- HSA (Health Savings Account): Provides triple tax advantages when saving for medical expenses (tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses).
- 529 Accounts: If passing your business to the next generation is part of your plan, a 529 account can help save for your heirs’ education with tax benefits.
By allocating funds to these accounts, you can reduce your taxable income now while securing your financial future.
Move No. 3: Diversify Your Investments
Diversification is one of the cardinal rules of investing. While your business may be your most significant asset, it shouldn’t be your only one. Here’s why:
A diversified portfolio ensures that if one asset underperforms, your overall investments remain stable. This doesn’t just apply to stocks either. Diversify across various vehicles such as real estate, bonds, and even private investments if appropriate.
For example:
- Invest in an index fund to gain exposure to the stock market with minimal effort.
- Consider real estate investments for rental income and long-term appreciation.
- Explore government or corporate bonds for steady, low-risk income.
Creating a portfolio that aligns with your risk tolerance and financial goals is essential for long-term success.
Move No. 4: Educate Yourself on Financial Markets
Understanding where and how to invest is exceptionally beneficial for business owners; it will prove especially useful when you experience a liquidity event such as … selling or passing down your business. Whether it’s private markets, ETFs, or managed accounts, knowing the basics will enable you to not only ask good questions but make more informed decisions with your money.
Here are practical steps to get started:
- Learn about the benefits of diversifying your capital in the public equity markets — i.e., stock markets.
- Explore how private markets, like venture capital or private equity, might fit into your strategy.
- Work with a financial advisor to understand tax implications, retirement planning, and risk management.
When the time comes to sell your business or hand it over to the next generation, a well-rounded financial education will help you evaluate options like reinvesting the proceeds or diversifying further.
Move No. 5: Get Professional Help
Even with a solid understanding of financial markets, working with a professional financial advisor can significantly enhance your decision-making processes and provide additional clarity and confidence as you navigate complex financial decisions in the short and long term.
As with each advisor you decide to make part of your business transition and succession planning team, an experienced financial advisor brings specialized knowledge and experience, which can help you assess personal financial opportunities and risks from an objective perspective. Additionally, he or she will stay updated on market trends and regulatory changes, ensuring your plans remain optimized and compliant throughout your financial life, relieving you of the pressure to keep abreast of the many day-to-day and year-to-year changes.
Ideally, you’ll find one able and willing to work closely with the rest of your advisory team — rather than independently. Insisting on such a structure is a simple way to ensure that no single advisor on your team is looking at opportunities or risk as they pertain to a singular areas of focus only.
By bringing their individual perspectives and areas of specialty to your big personal, financial, and business picture, an integrated team will be better able to help you identify opportunities and risks as they relate to and impact different areas of your business transition and succession planning journey as a whole.
Move No. 6: Remember Succession Planning Is a Marathon, Not a Sprint
Much like building a business, exiting one successfully — that is, in a way and at a time you desire — doesn’t happen overnight. The same goes for crafting your business transition and succession plan. They’re the result of years of preparation, financial discipline, and strategic decision-making. By combining business growth with smart investment strategies, you can ensure that both your company and your financial future are secure.
If you’re new to investing or feeling overwhelmed by the number of options available, start small. Build a strong foundation with tax-advantaged accounts and diversified investments. Over time, you can expand and refine your investment strategy to meet your unique needs.
And when the time comes to step away from your business, you won’t only be able to hand over the reins with confidence; you’ll also walk away with peace of mind.
About the Author: A principal of Rehmann’s wealth management division, Luke develops creative strategies that help clients work toward meeting their financial goals, integrating asset management and retirement plan services with overall business and financial plans. He works with a cross-functional Rehmann team to proactively guide each client while considering tax law and efficiencies, estate planning, and accounting needs along the way.
Investment advisory services offered through Rehmann Wealth, a Registered Investment Advisor. Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Insurance Services offered through Rehmann Insurance Group.