The Value of a Holistic Approach to Wealth

 

During the day-to-day challenge of running a business, it’s easy to focus on details, rather than the bigger picture. But when you take a step back, you’ll likely realize that your business goals, your life goals and your long-term wealth goals are intertwined.

 

That’s where a holistic approach comes in. Below, we offer some best practices to help you protect and preserve what you’ve earned.

Protect Your Personal Assets

You want to minimize the possible downside impact your business could have on your hard-earned personal wealth.

 

To insulate your business, incorporate it (we typically see clients choose LLCs or S-Corps) and have separate bank accounts, credit cards and accounting books. Resist the temptation to use your business credit card for personal expenditures.

 

Also, don’t skimp on insurance.

 

“Comprehensive insurance is one of the easiest and most cost-effective ways to protect your business—and yourself—against liability,” said John Gregg, a Wealth Planner at our affiliate, 1834, a division of Old National Bank.

 

You also want to have a retirement plan, personal savings and investments accounts that aren’t part of your business assets. While your business may have given you the ability to fund them, once they cross over into your personal wealth, keep them there.

 

This separation will give you peace of mind. You’ll also likely be more rational and clear-headed about business decisions when you know they’re decoupled from the wealth you’ve already accumulated. 

Hire a Wealth Team

If you’re like most business owners, you’re entrepreneurial and independent. In this spirit, you may try to coordinate your wealth planning yourself. This can be a mistake.

 

A dedicated wealth management team can help you with advantageous tax strategies, wealth transfer and preservation strategies, and ways to coordinate your business and personal wealth.

 

Additionally, when you need to conduct a business transaction (an acquisition, for example), you’ll work with wealth advisors and bankers who do it regularly. Why not leverage that expertise? Especially since your wealth team will partner closely with your business attorney and accountant, so that everyone is on the same page. 

 

In fact, hiring a dedicated wealth team often quickly becomes worth it, in terms of opportunities and efficiencies that you may have previously missed.

Save for Retirement

The earlier you start saving for retirement, the more time you have to capture earnings and growth. Traditional and Roth IRAs are a good start when your business is just getting off the ground.

 

For established business owners, setting up a retirement account may feel burdensome, but it’s very likely worth it—and you get favorable tax treatment. Smaller businesses could opt for a SEP IRA, a SIMPLE IRA, or if you’re only working for yourself, a Solo 401(k). Larger businesses can work with the retirement plan services division of their wealth advisory on setting up traditional 401(k) options for themselves and their employees.

 

One other option is a Cash Balance Plan (CBP). It’s a defined benefit plan, meaning that participants receive a set annual payment (or lump sum) upon retirement. Since a CBP is considered a private-sector pension, it’s protected by federal laws like a traditional pension plan and requires regular review by an actuary, to ensure that the plan is properly funded for all participants. Especially if you’re older and behind on your retirement contributions, it could allow you to contribute over $100,000 per year in tax-deferred earnings into a dedicated retirement account. It’s often most effective for smaller companies that have fewer than 15 employees.

 

Lastly, as you think about retirement and what your business is worth, be realistic about what you can depend on from a business sale. Receiving an all-cash offer may be a best-case scenario. Short-term notes are more likely. Or, if you’re looking to transition the business to the next generation, how much income will you really be able to draw? Answers to these questions should dovetail with your retirement planning—and your target goal for saving.

Diversify Your Assets

As a business owner, you likely have a lot of experience, expertise, and money in one particular area of the economy. In fact, this specialization may be the secret to your success. When it comes to your overall finances, however, having too many assets clustered in one sector can increase your potential for downside risk. To provide a hedge against this risk, many business owners choose to diversify their personal brokerage account away from the sector their business is in.

 

While adjusting a portfolio is the most common—and easily actionable—method of diversification, there are other options, such as alternative investments, occasionally known as “Alts.” These options can provide very targeted risk-balancing opportunities, but often have a higher financial entry point. 

 

For example, if your business is especially vulnerable to inflation, you may choose to become involved in real estate investments, a well-known bulwark against inflation. That could take the form of becoming an investor in an apartment complex, or buying and renting out a smaller apartment building yourself, or owning the building where your company has offices—and renting out the rest as a side business. 

 

Similarly, you may consider a private equity (PE) subscription in an industry or sector that differs substantially from yours—a sector that may benefit in conditions that challenge your business. If you did this, you’d gain two distinct areas of concentrated exposure within the economy and spread your risk.

 

For alternative investments, a dedicated wealth team can be a wonderful resource, starting with the generation of ideas, and going all the way through to the execution of a honed strategy.

Know What You Want from Your Business

Almost every business owner wants to maximize their opportunity for profit and long-term growth. But you also need to make sure your business is serving your personal needs. 

 

For example, consider your succession plan. How you structure your business now—and how you train your employees—will have an outsize impact when it’s time for you to move on from the business.

 

Even with highly talented employees, there will be a substantial learning curve before they’re ready to seamlessly transition into leadership roles. Starting that process now benefits everyone long-term; plus, the unexpected can happen. Better to be prepared—and have everyone know what to expect.

 

“As a business owner, you want to ask yourself why you want to sell. Is it because you want to get your children involved? Because you want to retire? Because you want to get top dollar?” said Gregg.

 

Business owners’ goals run the gamut: Gregg has seen everything from business owners near retirement contributing their business to a charitable trust, to owners transitioning ownership to their employees via an ESOP, to opportunistic sales to private equity firms.  

 

In each instance, careful strategizing years in advance gives you the best opportunity to achieve your goal.

Plan for Estate Taxes and the Next Generation

If you’re like most people, you envision leaving a legacy. In some instances, that includes one or more children continuing to run your business. If that’s the case, you’ll likely want to start considering tax scenarios now.

 

For example, you may consider a gifting strategy over the course of 5 or more years, so that your child’s eventual gift and estate tax burden is reduced. Plus, if you gift non-controlling shares of the business, you may be able to gift at a discounted rate compared to what you perceive the true dollar value to be, thereby reducing gift and estate taxes.

 

Or, you may want to take advantage of an irrevocable trust to pass your business to the next generation. Or, if you have multiple children who will run the business, you may need to restructure it, so that it better reflects this scenario.

 

And then there’s you to consider: As you exit the business, what level of control will you retain? Will you sell a portion to your children or draw regularly on payments from the business to enhance your retirement? What does this look like—and is it financially feasible for all involved?

 

Resolve these questions well in advance. And then work closely with your estate attorney, wealth advisor and children on developing a plan that sets everyone up for success.

We’re Here to Help

At 1834, we believe in the value of listening. You’re not just a business owner—you’re a unique person with your own goals and aspirations.

 

Let’s work together to build a holistic, customized plan for your wealth.