The Five Key Areas of Financial Planning: Retirement, Investments, Insurance & Risk Management, and Estate Planning
Most small business owners do not know the one vital number that could make the most significant difference in their financial goals: their “walkaway number.” The financial services industry’s long history of focusing on investments has been a disservice to individuals as financial planning is much more than just investing in the stock market. Financial planning includes retirement, investments, insurance, risk management, taxes, and estate planning. These five key areas are essential to make sure your financial goals are achievable, and without one of these pieces and an actionable plan, you’re likely to miss your mark.
Steven’s Story: The Importance of Financial Planning for Business Owners
I want to share the story of Steven, a successful manufacturing company making fly fishing gear. His story illustrates the importance of financial planning in achieving one’s financial goals.
Steven was 62 years old, married and had one son that wasn’t interested in the family business. He loved to travel and fish. At an industry expo, Steven met several retired owners and it got him thinking about exiting his business. He learned they were able to sell for $8+ million. Steven felt confident as his business was very well known, and a great reputation for quality work. So he reached out to an M&A advisor to get an opinion on his business value and start the process of selling it.
Steven met with the M&A advisor, who learned a lot about his business and eventually asked, “what’s your number?” Steven said he would like to get $12 million. He figured he’d lose one third of that to taxes and he felt they could live off of $8 million quite comfortably. It didn’t seem unreasonable because he believed his business was in a better position than either of the guys’ businesses he met at the expo.
A few weeks later, the M&A advisor informed Steven that there were two companies looking to expand their manufacturing capabilities and they were probably willing and able to pay the $12 million he was asking for if his business was in best-in-class shape. Steven was excited and started visualizing all the things he and his wife could do with the money, such as travel and fishing remote waters around the world.
Some time passed as the M&A advisor discovered more about Steven’s business. Finally, he came to the conclusion that Steven’s business was only worth about $7 million. The M&A advisor recommended Steven meet with a financial planner and get a clear picture of his financial situation so that Steven would be able to easily distinguish between a good offer and a bad offer (meaning it wouldn’t be enough to meet his goals). The advisor suggested that Steven might not need as much as he thinks. So Steven agreed and found a financial planner
After working with the financial planner, they determined Steven only needed about $6 million to pursue his goals of travel and fishing around the globe. However, Steven still faced a challenge: he could sell his business for $7 million, but after taxes, he would only receive about $4.6 million. Steven was devastated.
Working with a Financial Planner to Maximize Your Wealth
This is where Steven realized the importance of having a financial plan. His financial planner came in and implemented a variety of tax strategies to lower his tax bill and increase his net proceeds from the sale. First, they identified all of the possible tax saving strategies available to Steven and his business, such as 401(k) plans, cash balance plans, HSAs, and various deductions. They also explored the possibility of structuring the sale as an installment sale or utilizing a deferred sales trust, which would allow Steven to spread out the tax burden over time rather than paying a large lump sum all at once. They considered a 1031 exchange for a portion of the proceeds, which would allow Steven to defer taxes on the sale of his business by investing those proceeds in a similar business or investment property. Finally, the planner showed him how he could support some charitable causes that were dear to him while also reducing his tax liability.
By working with his financial planner to design a financial plan and implement these tax strategies, Steven was able to significantly lower his tax bill and increase his net proceeds from the sale. Instead of receiving just $4.6 million after taxes, Steven was able to walk away with nearly $5.8 million. Because he had increased his savings throughout the multi-year sales process, he made up the $200,000 shortfall and was able to achieve his financial goals and enjoy a comfortable retirement.
Achieving Your Financial Goals Through Comprehensive Financial Planning
As we see in Bill’s story, working with a qualified financial planner can help business owners identify tax strategies and other financial planning tools that can significantly increase their net proceeds from the sale of their business. By taking a comprehensive approach to financial planning and considering all of the key areas that impact their financial goals, business owners can maximize their wealth and achieve the financial security and stability they desire.