When you are the center of a small business, it’s not hard to lose sight of the big picture. Running the day-to-day activities often leads small business owners to overlook preparing for emergencies and succession.
If an owner under-insures and under-invests in their small business, neglects to plan for the future or unexpected events, a small business can easily go under.
Think Advisor’s recent article, “The 6 L's of Small-Business Planning” says that a successful business essentially becomes a security blanket. That’s because business owners don’t adequately prepare for events that could change the course of their financial well-being. It’s critical to address the important events that can disrupt everything personal and business.
Liquidity: If a business owner has to write a big check for some unexpected repairs after a storm, the money must come from somewhere. Small businesses rarely have substantial liquidity, because so much of their capital is tied up in the company. Therefore, a line of credit is the most frequent solution for owners with this situation. You should instead try to ensure that you have access to cash in the short term, if necessary.
Long-term disability: In many instances, business owners are the main contributors to their small company’s success. If they can’t work, the whole company can suffer. She should have a plan to protect against this scenario. First, it is important to identify who can step into a leadership role for a short time. If the disability is long term, examine the ways in which it might affect the company’s value and succession plan. You can purchase business overhead insurance or policies that offer income replacement. You can also create buy-out agreements, so key employees can buy out the disabled business owner.
Loss of life: In the event that an owner suddenly dies, you should have life insurance to fund a buy/sell plan. Without a plan, you may become forced to work with your deceased business partner’s spouse.
Long-term care: Baby boomers with business wealth may wonder what will happen if they need significant medical care, which is a legitimate concern. There’s an additional consideration: the elderly parents of business owners. If an owner steps away to help provide care for an ailing parent, the potential disruption to the company may be significant. Look at where the capital is going to come from to offset the cost of long-term care for family members, because you don’t want a forced liquidation of business assets.
Longevity: Consider the impact to the company, if the owner has an unusually long life. This should include an examination of how that person’s role will change and who will succeed them through phases of potentially decreasing interest and capacity.
Legacy/legal: Look at what the business owner envisions as her legacy for the future. There are numerous types of trusts, gifts and legal vehicles can be used to help make certain that the business won’t be ruined by taxes, when ownership is passed to the next generation. Talk to an estate planning attorney about doing this the right way.
Corporations and publicly owned companies have built-in processes that evaluate procedures, profits and risk. A small business would do well to take a lesson from big companies to schedule regular reviews and keep the business moving forward.
Reference: Think Advisor (May 28, 2019) “The 6 L's of Small-Business Planning”