Business owners, whether they run an accounting firm or a feed lot, are probably reeling from the financial challenges of the last few years. They may be:
o Rebuilding from a severe and prolonged recession;
o Sorting through recent health care reforms that may add new layers of administration and costs; and/or
o Planning for looming tax changes that will affect their business, their income and their estate.
If you are an advisor to a business owner, you may be competing for the business owner's time, loyalty and checkbook. In economic conditions like the present, business owners are faced with multiple and competing financial demands and recommendations. They must choose among various needs and wants and often their priorities are determined by what is upfront and most pressing at the time. They need an advisor to help make sense of their financial priorities.
How can we help the business owner prioritize?
Successful business owners know they must balance the present with the future, the now with the later. But it is not easy to think about their financial future when they are worried about payroll, health insurance costs, and the price of gas. As professional financial advisors we can help. When presenting our financial solutions, we are focusing on the future -- what can happen and what will happen. We can help business owners determine their long-term financial needs, prioritize them and fund them.
A way to jump-start the process is to ask the business owner to identify long-term financial needs and then ask them to prioritize these needs. By asking the questions, we are helping the owner define the challenge. When we have them choose among a list of needs, we are helping them put context to their financial fears. When we ask them to prioritize, we are helping them to work towards a solution. The answers lie within the questions.
Consider the following process to help the business owner identify and understand their long-term financial needs. This approach relies on questions from the advisor to prioritize the opportunities and to generate the solutions.
Step 1
Lay out a list of six long-term needs, but do so in the form of questions:
1. Survivor income: How would your survivors fare if you were no longer around to run your company? What would they do for income?
2. Income protection: If you were to become disabled, how would you protect your income for you and your family?
3. Business protection: What steps have you taken to protect your business against the loss of your key employees? What if they died or became disabled -- have you set up a way to indemnify yourself for that loss? How can you avoid losing them to the competition?
4. Retirement: If you are like many private business owners, your business is in many ways your retirement. Will you have enough to fulfill your retirement goals? How will you convert your business equity into retirement income?
5. Exit planning: Will you be able to exit your business on your own terms? Have you taken the steps necessary to assure a successful business transition?
6. Wealth transfer: How can you take your hard earned wealth in your business and transfer it to your heirs, in the way you want to, without losing a large part of it to taxes and expenses?
7. Other: Are there other long-term financial goals I should be aware of?
Step 2
Ask the business owner to prioritize among these financial needs. It is tempting for the business owner to say, "they're ALL important." But, in order to truly tackle the list of long-term financial needs, the owner must prioritize the needs. Further, if you are to help, you need to know what steps, if any, the owner has taken to-date to address these issues. A way to move this process along is to ask the following follow-up questions:
o If you were to rank these needs in terms of priority, what would the order be?
o How would you rank these needs, from one through six?
o Some of these top priorities are ones that you may have already started to address. Among these top financial needs, what, if anything, have you done so far to deal with them?
Step 3
Agree on which needs to tackle first, and proceed with fact-finding. For example, once you've gone through the first two steps, ask the business owner:
Based on what we've discussed, it sounds like your most pressing long-term financial needs are: (1) How to exit your business, and (2) How to assure that you and your spouse will have an adequate retirement income. Would you be comfortable with us starting with these two issues? Can I ask you some specific questions in order for me to help you quantify your needs and derive at a solution?
Step 4
Fund the needs in order of priority. This process is designed to narrow down the field of competing needs to a manageable list. Because it is sequential, it allows for appropriate products to be placed without first requiring that all the financial needs be analyzed and addressed.
So, for example, if the business owner agrees that exit and retirement planning are the top two priorities, life insurance can be sold to both fund a buy-sell plan and create a source of liquidity for the retirement plan. After these issues are analyzed and have been funded, the next need may be to acquire disability income on a key employee.
Throughout this process, the continual asking of questions directs the need and suggests the solution. Business owners are vexed by the constant onslaught of financial demands. By using a series of planned questions, you can help the owner prioritize and fund their long-term financial needs.
Steve Parrish, JD*, CLU, ChFC, RHU, is a national advanced solutions consultant with the Principal Financial Group in Des Moines, Iowa.
*JD is an educational degree and the holder does not provide legal services on behalf of the companies of the Principal Financial Group.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that the author is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
