When you are a business owner you are susceptible to many risks. If you are reading this you know this already, but you may not know if you are protected. This is why having a financial advisor who specializes in business owners is key.
Business Owners who work with us think about risk in two ways.
The Boat Sinkers
The goal when building a risk management plan is to start with the boat sinkers. This blog is going to give you a clear game plan to avoid the boat sinkers.
Now that we have our brains thinking about everything that could go wrong. Let's look at the real-life examples we are going to explore today.
Business Boat Sinkers:
Forced to Sell Your Business
Lawsuit Crushes Your Business
Taxes Force G2 to Sell the Business
Personal Boat Sinkers:
Personal Lawsuit Costs You Millions
Family Loses Your Income
Creditors Take Your Assets
Each one of these situations is a nightmare to deal with, but thankfully there is a solution to protect you from each of these events.
Business Boat Sinkers
Situation - You are forced to sell your business.
You have been building your dream company for decades. You have built an amazing team and business with your business partner. One of you focuses on the vision while the other keeps the train on the tracks. One day your business partner informs you that he has a terminal illness. Later that year he passes away. Unfortunately, you do not have the capital to buy his shares of the business from his spouse and are forced to sell your business.
The most common solution is to execute buy/sell insurance. This is an insurance policy that is intended to pay out in one partner's death to buy his or her shares.
Situation - A lawsuit crushes your business.
You are running a high-growth HVAC company. What started in your basement is now a multi-million dollar business. As you grew the business you focused on the main thing ~ growing revenue and serving clients. Unfortunately, you never looked at your commercial liability coverage until it was too late. Your company installed a hot water heater incorrectly at a home and it burned to the ground. Fortunately, no one was home but the homeowner is bringing a lawsuit.
Your business isn't stagnant. The proper liability coverage needs to be reviewed on an annual basis to ensure it is growing as your business is growing.
Situation - Your tax bill forces the next generation to sell the family business.
The business you started is now an enterprise. Your goal has always been to pass the businesses down to the next generation. You believe you have covered all your bases. You spoke with your corporate counsel. You have executed a succession plan with your kids, but you never considered estate taxes. One day you suddenly pass. At that time your business has been valued at $50,000,000. Without proper planning, this leaves you with a $15,000,000 tax bill at your death. The only way to pay this tax bill is for the next generation to sell the family business.
Proper estate planning will avoid this situation. Often times the best solution is to have a life insurance policy in place to pay your estate taxes. Here is a video on how to avoid estate taxes.
Financial advice for entrepreneurs is unique. Ensure your risk management plan avoids these business boat sinkers.
Personal Boat Sinkers
Situation - A liability lawsuit costs you millions of dollars.
You are a busy entrepreneur. This doesn't stop things from breaking in your house. One day your roof is leaking and you text your neighbor to see if they have a recommendation. They send you their "guy" who is an expert and is a low-cost provider. This "guy" shows up at your house pops on your roof and slips. Fortunately, he only has a broken leg, but after googling your name he decides to sue you. Little did you know that he has no business insurance.
There are two key ways to protect yourself from these instances. The first is to ensure your home liability coverage has the proper coverage. Typically we see this being $500,000 of personal liability coverage. The next layer is an umbrella policy to protect you in the event of excess liability.
Situation - A family loses the income to fund their lifestyle.
You have done the hard thing. You quit your W2 and started a business. During this time your income has grown to the point that your wife can stay at home with the kids. It is an amazing feeling to be able to support your family and allow them to have a great lifestyle. This is the first step in your business, but your business still relies on you working in the business. Unfortunately, you suddenly pass away and your income goes with you.
The simplest way to protect your family from loss of income is life insurance. Typically we see term insurance as the most cost-effective way to protect from this tragic event occurring.
Situation - Creditors take the assets you have passed to the next generation.
You have spent your entire life protecting your family. Part of your plan was an estate structure to protect your assets. After you pass away your children receive all of your assets. One important detail you left out was a co-trustee for asset distribution. Unbeknownst to your son he needed to leave his assets in life trust to keep his creditor protection. After a failed startup venture the creditors can access the funds you passed down to him.
In order to receive creditor protection your assets need to be in life trust for your kids. This can be an easy win but needs to be set up and communicated to the next generation.
Financial advice for entrepreneurs is unique. Ensure your risk management plan avoids these personal boat sinkers.
Our goal at Moment Private Wealth is to help you avoid these common mistakes. This is why we help with risk management for business owners. It isn't enough to know what tools to use but you need a team to help you implement.
If you are an entrepreneur who is concerned about a potential risk, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
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*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.