As a business owner, you pour your heart and soul into building your enterprise. You’re focused on growth, operations and serving your customers. But sometimes, in the whirlwind of running a business, personal financial planning steps are overlooked.
Here are four common financial planning mistakes business owners often make, and what you can do to avoid them:
Mistake No. 1 – not having an exit plan
Many business owners are so focused on today’s growth that they neglect to plan for tomorrow’s exit. But eventually, every business owner steps away. Not having a clear exit strategy is a major pitfall.
Who takes over?
Have you considered whether a family member, a key employee or an external buyer (like a competitor or a private equity firm) will take the reins? Each path has vastly different implications for valuation, transition and your personal involvement.
The sooner, the better
The earlier you define your exit plan, the easier it becomes to structure your business, build its value and prepare for a seamless transition. Thinking about your exit early is not giving up on your business; it’s smart planning for its future and yours.
Mistake No. 2 – failing to protect the business value
Your business is likely your most valuable asset, yet many owners leave its value vulnerable to unforeseen risks.
Over-reliance on a single customer
Having too much of your revenue tied to one major customer can be a house of cards. If that customer leaves, your business value (and often, its existence) could plummet. Diversifying your client base is crucial.
Lack of key person protection
What if a vital employee – someone whose skills, relationships or knowledge are indispensable to your operations – suddenly leaves, becomes disabled or passes away? The loss of a key person can cripple a business, affecting cash flow, client relationships and overall value. Being prepared for such an event, perhaps with key person insurance, protects your business from this sudden shock.
Mistake No. 3 – blurring personal and business expenses and poor record-keeping
It’s tempting for business owners to commingle personal and business finances, especially with tax deductions. But this can create a huge blind spot for your future personal expenses.
The ‘company perks’ trap
Using a company car for all your transportation, deducting all business meals and travel: These are legitimate business expenses. However, when you retire and no longer have the business to cover them, these expenses reappear on your personal ledger. Many owners forget to account for these “phantom” personal expenses in their post-retirement budget.
Inaccurate books and records
This isn’t just about taxes; it’s about understanding your true financial picture. Without accurate, separate books and records, you can’t properly assess your business’s health, its true profitability or its value for a potential sale. This also complicates your personal financial planning immensely.
Mistake No. 4 – underestimating the effect of income taxes (and lifestyle costs) on sale proceeds
Business owners often dream of a large sale price, but they frequently fail to calculate the true “net to pocket” after taxes and fees.
The “net proceeds” reality check
Your business might sell for $5 million, but after capital gains taxes, broker fees, legal fees and other transaction costs, what actually lands in your personal bank account could be much less. You need a proper estimate for this net amount.
Can you live off the proceeds?
Once you have that net figure, the critical question becomes: Can you truly live off those proceeds for your desired retirement lifestyle? Treat the proceeds of your business sale no differently than living off a 401(k) plan. The classic assumption is often a 4% annual withdrawal (adjusted for inflation) if you plan on living off it for 30 to 40 years. Have you stress-tested your post-sale income against your projected living expenses? What is your concrete plan for living off the proceeds after all fees and taxes are accounted for?
The bottom line — plan for prosperity, personally and professionally
Running a successful business is a testament to your hard work and vision. Don’t let these common financial planning mistakes jeopardize your personal financial security. By addressing these areas proactively, you can ensure your business success translates into a secure and fulfilling future for you and your family.
Ben Soccodato and Chris Kampitsis lead the The SKG Team at Barnum Financial Group in Elmsford.
