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Holistic Wealth Blog

Writer's pictureRobert Dunn, CFP®

Strategies for Building Wealth as a Business Owner 

Updated: Nov 22



cranes building money; building wealth

Key Takeaways   

  • Business owners often neglect personal wealth-building, relying too heavily on the potential value in their company.  

  • Investing in a low-cost, well diversified stock and bond portfolio provides the growth you need without the risk of inflation erosion found in CD’s, life insurance and saving accounts. 

  • Be sure to review how much personal spending you run through the business when calculating how much money you’ll need for your lifestyle post-exit.  


Many of you reading this post are successful business owners. You’ve taken huge risks and worked incredibly hard to overcome the odds of building a thriving enterprise. You’ve taken your hard-earned profits and reinvested in your business. Chances are, you’ve built up significant value in the business, but are you saving enough for the future?  


I ask this question because most entrepreneurs like you are huge risk takers. You bet heavily on yourself and your business, but you tend to be risk averse when it comes to saving enough for the future. Many have the perception that investing in stocks, mutual funds, or exchange traded funds for one’s retirement account is perceived as being riskier than investing in the business.   Instead of having your money work as hard as you do, you tend to store it in the bank where it gets eroded by inflation and taxes. That sounds pretty risky to me. You tell yourself you’ll have all you need for retirement when it comes time to exit the business, but more often than you think, that’s not the case.   


Now that you have built a solid foundation for your business, it’s crucial to consider your long-term outlook. What are you doing with the profits? Are you minimizing taxes and maximizing savings? Are you evaluating your (and your family’s) spending will look like when you no longer have the business piggy bank to draw on?   Have you (and your financial advisors) calculated how much longer you’ll need to keep working to meet your goals? Have you figured out how much you’ll need to take out of the business to support the lifestyle you want post-exit? When working with business owners, we like to have them think of their future retirement needs as a current expense – a big bill, if you will.  If you don’t think you can pay that “bill” now, then you’ll have to work a little longer, cut back on your lifestyle, or make your money work harder – sometimes all three. But first, it is very helpful to understand your personal financial circumstances after you are no longer involved in the business.   


Being Too Cautious With Your Money Is A Bigger Risk Than You Think 

I’m amazed at how many risk-taking business owners get queasy about investing their hard-earned money beyond CD’s, life insurance and bank saving accounts. To a certain extent I get it. You feel you can control the risks when betting on yourself and your business, but you can’t control risks in the broader financial markets.   I hate to say it, but your F.E.A.R. (False Evidence Appearing Real) about investing in the markets is simply a lack of understanding. Basic financial literacy courses taught in high school and college don’t talk much about creating wealth. So, for too many people, including business owners, investing and wealth building decisions are based on what they hear in the media and on the golf course.


However, if you find the right partner (sorry, not an insurance broker, local banker, or Investment broker) to help you plan your wealth and bolster your financial education, you will have newfound confidence when it comes to investing in other entrepreneurs – the stocks and bonds of publicly traded companies. We typically recommend using a Certified Financial Planner (CFP®) who works with a fee-only financial planning firm.

 

Investment portfolio management. Diversified strategy using stocks, bonds and commodities. Pie chart and candlestick charts.

Once you begin your post business owner savings and investing plan, it’s important to stay well diversified, this helps you spread your risk over a large number of companies and industries. A few may underperform, or even fail, but they’re all not going to fail at once. And research shows the broad stock market has returned on average 10.7% annually since 1957 despite all the ups and downs in the markets and economy. At that rate, thanks to compounding, your money doubles every seven years. That’s a far higher return than you get by stashing it in the bank.  


Factor In Personal Expenses Paid By The Business

As you start planning your exit, it’s very important to get a handle on all the personal expenses you run through your business. Chances are you’ve experienced “lifestyle creep” as your business becomes more successful. So, it can be a big adjustment when you must start paying “out of pocket” for your club memberships, travel, cars, dining, sporting events and entertainment, etc. Those expenses need to be added to your retirement budget.  


Our goal is to help you to be able to maintain the lifestyle you have become accustomed to. However, many owners tell me: “I’ll cut back on my spending when I retire.” What often isn’t realized, it’s very hard to give up the “successful entrepreneur” lifestyle, especially when so many people are telling you you’ve earned it with all your hard work and sweat. So, it is important to be realistic about how much income you’ll need to maintain that lifestyle when you no longer have a “paycheck” and can no longer write off so many of your “enjoyment” expenses.   When it comes to planning your exit from your business, we like to do it in two stages: 


Wants or needs symbol. Turned wooden cubes and changed the word wants to needs.

Stage 1 Review your needs, wants, and wishes in retirement. Life while working and not working can look different. It is important that you take some time to truly evaluate what is important to you and your significant others. This will help you back into how much money you will need to meet the needs, wants, and wishes in your life. This exercise will help you understand what is needed when you finally choose to step away from the business. If you are struggling to do it on your own, this is an exercise that is common for the advisors at Novi to perform with their clients.


Stage 2 Determining the best most tax efficient methods for savings. While employed, you may be paying the IRS more than you need to. Wouldn’t you like to take advantage of the last few tools that remain to help reduce your tax bill? Creating wealth requires knowledge and execution. As an entrepreneur you have done this with your business. It is important to apply your entrepreneurial mindset to wealth creation.  


When it comes to generating sufficient income in retirement, I can’t stress enough the importance of building a well-diversified stock and bond portfolio that’s low in cost and that aligns with your risk tolerance and time horizon.  


As a business owner, you have lots of contact with insurance agents because you need liability insurance, health, errors and emissions, property and casualty, and many other types of insurance to protect your business and your people. Agents often want to sell you “savings” products like annuities or whole life insurance to meet your retirement income needs. But those policies are not the best options for saving for your future. They are typically very expensive and very rigid in their application. Again, you are better off investing in a low-cost, diversified investment portfolio to build your wealth. As a reminder, Novi is a fiduciary (work in your best interest). As your insurance agent or banker if they can say the same.   


Final Reason To Ensure That Saving And Investing Is A Part Of Your Plan  

According to Exit Planning Institute surveys, 80% of companies listed for sale don’t sell, and 70% of family businesses don’t transfer on to the kids. In many cases, it’s not that the businesses aren’t viable and successful; it’s because the owners haven’t taken the time to plan their exits properly. It can take years to plan correctly. You need to prepare yourself and your company for the transition. There are many crucial steps that must be taken, and by dedicating time to transferring your knowledge and experience to others, you will improve the likelihood of having a saleable asset.  


Lastly, you need to prepare yourself. Often owners haven’t run the numbers realistically to know how much “walkaway” money they’ll really need for a sale or transfer to be enough to support their retirement lifestyle. Put the odds in your favor. We have helped many successful business owners like you address the financial and emotional aspects of transitioning out of their businesses and successfully paying their “retirement bill” with room to spare.  


In Part 2 of this post, we’ll talk about all the different options available to business owners to build up retirement savings, diversify investments, and mitigate taxes. 


Conclusion  

If you or someone close to you is thinking about exiting your business contact us any time to discuss. We’re happy to help. 

 

 ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth  

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