For many successful entrepreneurs, it can be difficult to tell where their business ends and their personal lives begin. These driven professionals spend almost every waking moment (and sometimes even sleeping ones) thinking about the how to take advantage of opportunities for growth or, conversely, how to overcome obstacles that may keep their companies from running smoothly. Entrepreneurs often come to feel that, as long as they stay focused on the business, many other issues – both personal and professional – will work themselves out.
This blurring of the lines between a business owner’s personal and professional lives frequently extends to their thinking about financial planning, too – as well it should, since their most valuable asset will usually be their ownership stake in the company. Entrepreneurs need to be aware, though, that the practice of putting the business first and trusting that other matters will fall into place – while it may have served them well in building the company – can also leave them underprepared or exposed to unnecessary risks when it comes to personal financial questions.
In my experience advising dozens of business owners over the years, here are some of the key issues that entrepreneurs should bear in mind when it comes to positioning themselves to translate their professional success into financial security for themselves, their families and their heirs.
Retirement Planning: Diversification Still Matters. There is no question that a successful entrepreneur’s best use of capital is often to re-invest in his or her business. The know-how, talent and commitment that helped them establish and build the company in the first place will frequently mean that re-committing cash to the enterprise – in essence, betting on themselves – will yield a higher rate of return than might be available through traditional investment options.
Unfortunately, there will always be factors outside a business owner’s control that can impact a company’s valuation and the owner’s potential exit strategies. During the financial crisis, one of my clients – a successful long-time entrepreneur – encountered difficulties with his company at the same time that he suffered an unexpected death in the family. He needed to quickly shift gears and focus on personal matters, but the economic climate made a successful exit from the business highly unlikely.
Fortunately, he had been careful to diversify his assets by establishing and maximizing a defined benefit plan. When the crisis hit, he had built up a cushion large enough to allow him to retire from his company and focus on personal matters. Despite the pain of seeing his hopes for an orderly and lucrative exit fade, his foresight and willingness to develop a portfolio of assets outside the business meant that he had strong options – and the ability to control his own future – when the downturn came.