Business owners are people.
Their dreams and aspirations mirror what most of us want in life - an uncluttered path to realize both personal and financial dreams. Their challenge is to find time to chart a course while simultaneously building and running their enterprise.
Business owners need our help to ensure their family is protected, their livelihood is sustained and their business has the right successor in place well in advance of retirement. But before reaching for your product toolkit, financial services professionals must think about listening first and prescribing later. Consider yourself a financial therapist.
Businesses differ by design, industry, and owner dynamics. And these challenges become more significant when that business is family owned. An owner's success solutions and the combinations of products that may help him or her can be just as varied.
One treatment for the challenges business owners face in today's uncertain market is whole life insurance. At one time, whole life was very popular and later overlooked in the business marketplace. But in today's economic environment, many business owners are rediscovering its benefits.
Whole life insurance which grows in cash value over the life of the policy can assist a business owner in protecting, maintaining and leaving his business for retirement. How one will fashion a plan is dependent on where the business owners is today and where he/she wants to go.
A family business we helped recently with whole life is something worth sharing. The food processing and distribution business is the sole source of income for three family members. It had been in operation under this ownership for eight years, however, it had been an existing enterprise for more than 90. The business was often subject to cash flow fluctuations and had enjoyed a substantial line of credit with their local banker to fill in the gaps when cash levels were short.
The owners were current in their payments to the bank and always current in their payments on their credit line. However, as has been the case in recent years, the bank began to set about steps to reduce their line of credit, a move that would have jeopardized the business' cash-flow need.
Had it not been for the whole life insurance that all three owners had owned for some time, their business would have likely failed for lack of cash. The owners were able to use the cash value as a line of credit until they were able to reestablish relationships with a new lender.*
The above scenario is not uncommon. In the last few years, many small business owners have experienced a cash flow and credit crisis in the tough economy. Many clients have not been able to borrow freely to reinvest in their business or product line because banks were not lending or lending less.
Without access to an emergency reserve when things like payroll or receivables are late, devastating consequences could occur. The business owner with a whole life policy that has built up cash value, offers access to cash to meet receivables or acts as an asset that banks consider favorable thereby potentially increasing access to credit to ease the strain of hard economic times.
This same product can help small business owners attract and retain key executives by helping fund executive bonus compensation. These arrangements are portable to the employee and tax deductible to the business. Financial professionals can help guide employers on how to structure these arrangements so that they are mutually beneficial.
Whole life insurance and other financial products can also be used in concert to help the business owners plan for successful retirement and transfer of their business. Exit planning is critical and must occur at least 10 years before a business owner wants to retire.
And yet I am no longer surprised when I meet these owners who tell me no one has ever talked to them about the necessity of taking action in order to retire comfortably and allow the business to transition to the next generation with valuation in tact.
Having a funding mechanism in place like a buy-sell agreement funded with whole life insurance can help a surviving partner maintain ownership of the company after a partner's death and equitably buy out their former partner's interest in the business.
And yet whole life is not the only financial solution a business owner must look to in order to keep their business healthy and successful for the long term.
Disability Income protection on owners and as part of a buy-sell agreement can be a critical protection mechanism for any business. For example, if one business partner is disabled and can no longer work, a buy-sell agreement funded only with whole life insurance will not help the able-bodied partner buy their partner out.
The chance of a disability for people as we are live longer and enjoy the advances in medical science can sometimes be greater than death. Furthermore, while advances in medical technology can save lives, it does not always mean a person can continue working in the same capacity they could before. Unfortunately, many businesses have not established plans to include permanent disability in their planning scenario.
Indeed, there is much to talk to about with business owners. But the only way to be effective for them is to listen and learn. So open the door to dialogue by listening and you will successfully be able to pinpoint which strategies they need.
Paul Fox is president & CEO of Cleveland's Skylight Financial Group, a general agency of the Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, Mass.