Most CEOs have achieved some level of success in their business and finances, as well as their personal lives. Beyond that, many seek something more – a bigger meaning, purpose or legacy. Finding that significance is a very personal journey; however, most successful people discover that aligning all the components of their lives (personal finances, business success and family satisfaction) leads to a sense of liberation that includes financial freedom as well as peace of mind.
This is the fourth article in a five-part conversation about this journey to significance, where we’ll explore strategies to integrate your life plan and your financial plan with your business plan. Here we are talking about your personal financial goals. And in talking about that, we are also talking about creating freedom. Not freedom from work, necessarily, but transforming your mindset from fear or dread surrounding the exit to excitement for the future.
Building an interdisciplinary team
No single professional brings all of the knowledge and skills necessary to design and implement a successful financial plan that includes your transition out of the business; you’ll be best served by a multi-disciplinary group of experienced experts working together to help you achieve your goals. Your core team of advisors should include your accountant, estate planning attorney, business attorney and wealth advisor. You may also want to include specialists to address matters such as life insurance, business valuation, ESOPs, private equity and other concerns as needed.
If you haven’t previously established a relationship with one or more of these core advisors, now is the time to do so. Given the deeply personal nature of the decisions involved, it is critical that your advisors know you and your family well, and that you develop a trusted rapport over time.
Reframing personal financial planning
Since the business is likely to be your biggest asset, your financial plan depends on what happens with the business. Therefore, financial planning for business owners demands a mental shift from “managing your business” to “managing your wealth holistically,” which includes the wealth inside of your business along with all other assets.
Your financial planning process should start with a business valuation (either formal or informal). The business valuation process can be eye-opening when it’s coupled with comparisons to your industry average benchmarks to answer questions like:
- What drives the value in your business?
- How does it compare to averages and best in class?
- Is your business currently at a discount or a premium?
- What are those ranges of value?
- Where is it possible to move the needle, and what would it require?
Regardless of the direction you want to take, you need a road map for business improvement. Your business is an investment; you are growing the value in that investment by monitoring your strengths, addressing gaps and remaining watchful of KPIs and profit margins.
Creating a continuous evaluation process
There are four key challenges in financial planning for business owners:
- Understanding cash flow – Analysis of current and future cash flow is critical since it governs your income and spending, now and in the years to come.
- Managing risks – This includes reviewing insurance coverage, asset titles, asset flow plans, estate documents and named beneficiaries on accounts and policies.
- Assessing business value – A realistic valuation lets you analyze transaction structure and pricing for multiple exit scenarios and evaluate the tax implications of each one.
- Managing assets – Your treatment of assets now and after you pass creates tax consequences that impact net value for you and your heirs.
None of these elements are one-time events. For business owners especially, financial planning is a process – an interactive financial modeling exercise that’s repeatable, fully integrated with your life plan and focused on two priorities: your business and your family. The entire process is an investment in your future and a cycle of continual improvement and refinement; plan to hold a strategic review with your advisors at least annually.
Together these four elements enable you to create a comprehensive wealth management plan addressing retirement goals and objectives, cash flow in retirement, insurance, estate planning, wills and trusts, healthcare directives, charitable goals and financial resources for family members.
Connecting the dots
It’s important to augment your data with extensive scenario planning and stress-testing to cover a wide range of variables. What happens if the business value changes dramatically? How would you want or need to respond to a significant market shift? Would a medical event for you or your spouse require alterations to your plan?
Once you can clearly see what you have today and what happens over time, looking at various scenarios and considering different probabilities of success, it’s possible to start connecting the dots between the business and your personal life. You’re able to gauge new opportunities and their financial impacts in a more meaningful way.
Whether it’s managing risks, building value in the business or harvesting that value, you have the data you need to inform decisions and answer the real questions – what do you want, and what are you ready to do? How much is enough? When an offer comes in, you don’t have to wonder whether it works for your goals.
Going through this process every year is smart business strategy that can keep your business, finances and life plan fully aligned. Your RKL advisor is here to help you every step of the way.
