Best and Worst Financial Planning Practices for Business Owners

The purchase or sale of a company is perhaps the most impactful event of a business owner’s career. Financial planning is an important part of preparing for a business sale. Here are some of the best and worst financial planning practices for business owners.

Best Financial Planning Practices for Business Owners

Successful business owners utilize successful financial planning strategies. A few examples include:

Start financial planning early

The more time you have to plan, the better your financial decisions and outcomes will be. You can accrue wealth through profit and invest it over time.

To help with your planning, hire a fee-only financial advisor who you can trust. Good advisors will help you know how much debt to take on, when to pay down debt, where to invest, how to protect your estate and more.

Keep business expenses lean but appropriate

Both underspending and overspending on business equipment, improvements, staff and marketing can hurt your bottom line. Find a balance that is enough to maintain a growing business, but not too much that it no longer makes an impact.

The timing of your capital expenditures can often be as important as the purchases themselves. If you are nearing retirement or a business sale, speak with a business broker before making any major purchases. Experts can also help you see where you can increase or decrease spending.

Know your business value

Knowing your business value can help in financial planning, as it can set a benchmark for future profitability goals, help establish a future retirement timeline, and even help determine an accurate value of your estate. A business valuation can also help you be prepared for unexpected circumstances; you never know when you may need to quickly cash out of your business to deal with health challenges or disability.

Worst Financial Planning Practices for Business Owners

Unfortunately, too many business owners make poor financial planning decisions that affect their profitability and wealth now and in the future. Here are a few examples of practices to avoid:

Rely on your business sale to fully fund your retirement

Relying solely on your business sale to fund your retirement could potentially be detrimental. It’s important to have other income sources for your retirement.

Sometimes business owners become too ill to continue working, but they are not yet prepared for retirement. Their companies often decrease in value and proceeds become minimal, requiring them to take a financial hit to retire or continue working with no other options.

Overextend yourself or your business

Avoid “keeping up with the Joneses” and worrying about accumulating material goods for yourself or your business. Being the “best in the business” need only apply to your skill, your team and your service.

Selling too late

Business owners have spent years building their companies. They may feel a range of emotions at the thought of stepping aside from something they’ve poured their sweat, blood and tears into.

In addition, running a business is extremely time consuming. For this reason, many business owners find it difficult to take a step back and establish an appropriate exit strategy that will benefit them long-term. As a result, far too many business owners work past their peak years, leading to a decrease in business value when they finally decide to sell.

If you know that retirement is on your horizon and you haven’t yet dedicated the appropriate amount of time to establishing a plan, some questions to ponder include:

• Am I still able to work at a level that my customers and employees deserve? If yes, how much longer do I expect this to continue?
• Do I still enjoy running a business on a daily basis? If yes, how much longer do I expect this to continue?
• Where is the future of my industry heading?
• Do I know what my sale options are?
• Do I have concrete plans in motion to achieve a favorable exit, such as establishing a specific retirement timeline and goals?
• Do I know what I plan to retire to?

Don’t wait until you’re ready to retire to engage a business broker. The best time to reach out is two to three years before you plan to sell to maximize your financial exit, keep sales options open, and ensure the future success of your business.

These tips are just a few dos and don’ts when it comes to financial planning. Every financial scenario is unique, so you should consult with an experienced financial advisor or wealth management consultant.

If their wealth is managed properly, business owners have a fantastic opportunity to enjoy a prosperous life and a comfortable retirement. Smart financial decisions made throughout your career can affect how and when you can retire. Your financial planning can also determine the flexibility and freedom you have to make decisions when unexpected life events occur.