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Market and Investment Insights

Business owners generally have a few common questions on their minds when it comes to their financial planning. Often they wonder what can be done today to improve their long-term financial situation. Another recurring thought is turning their business into a source of retirement income: Is what I am building going to be enough to live the life I want to live in retirement?

Some of the more self-aware owners also wonder if they’re realistic.

You may find it surprising to learn that we come across as many owners who undervalue their business as overvalue it. Like many of the important things in life, these are tricky questions that can’t be answered with a quick calculation.

At a basic level, financial planning takes your current assets, liabilities, income, & expenses and projects those out into the future, including assumptions about inflation and rates of return on investments, plus annual savings, to name a few. The output of the financial planning process is information on whether you’re on track to meet your retirement or other future financial goals and, if not, what changes need to be made to get on track.

Financial planning for business owners is infinitely more challenging than for someone with a salaried job and defined benefit pension. This is because the business owner’s income is more variable — their business is an illiquid asset that can be a majority of their net worth. The business’ value can fall in a wide range and can change significantly in the future.  Nonetheless, business owners can do some complex financial planning with some reasonable effort and assumptions, and the results can be very rewarding and insightful.

There are five elements to the financial planning process for business owners:

1. The first step in financial planning is to establish your current financial situation regarding your net worth (i.e. assets and liabilities) and your income and expenses. Your net worth at retirement will fund your retirement income needs along with whatever government pensions you are eligible to receive, so that’s the number you want to increase between now and your retirement date.

Assets can fall into several categories: real estate, registered and non-registered investment accounts; your business; insurance policies etc.  Most of your assets can be readily valued. Your business’ value, however, is the hardest to establish and will take the most time, but we can do a pretty good job of coming up with a realistic value. Liabilities can include mortgages on real estate, lines of credit, credit cards etc.

2. Next, we calculate your income and expenses. When looking at your income sources, it’s also worth considering if you’re taking income in the most tax-efficient manner, especially ‘from your business. Also, it’s worth noting that the federal government recently tightened rules on income splitting, and that should be reviewed to make sure you’re onside with the current rules.

Once we have all your current information gathered, the second step is to discuss your future goals in both financial and non-financial terms. Everyone has different goals, but the common theme is that everyone’s financial & estate goals must be met from future net worth and income. We can’t help you determine if you’re on track to meet your goals if there isn’t a clear picture of what they are. Some examples of goals would be: when you want to retire; what your income needs will be in retirement; money you’d like to give or leave your family, a charity or even a beloved pet. (Be cautioned though, we are likely to have some additional words of advice about the latter.)

3. The third step is to establish the fundamental assumptions we’ll use when running the financial projections. These assumptions will be key drivers in projecting your future net worth and retirement income, and they need to be realistic and fact-based. Some key assumptions would include things like: the rate of return we will assume you earn on your investment portfolio; the year you sell your business and the net proceeds you realize after taxes and fees; how much you save every year between now and retirement and which account you direct the savings to. Another assumption could be around what you net from the sale of your business. While we can help you estimate what you may gross from your business’s sale, we also have to consider selling fees and legal fees plus potential taxes.

4. Once we have done the leg work from the first three steps, we can start crunching the numbers, including your current financial situation, goals and assumptions and start running year-by-year income & expense and net worth calculations.  The projections in your pre-retirement years should see your net worth grow year by year as your assets increase in value, you pay down liabilities, and you direct savings to your investment accounts. Once you retire, you begin to draw from your net worth to supplement those government pensions and meet your retirement income needs.

One of the critical questions we will address is how much you will need to save each year to achieve a net worth that will fully fund your retirement and estate goals. We then compare that against how much you’ve been saving and plan to save in the future years before retirement.

5. If the initial analysis shows a gap, i.e. what you are saving is less than what you need to save, we can create possible action plans to close or eliminate the gap. Many levers can be pulled to reduce or eliminate a shortfall. Of course, the earlier you begin the planning process and the longer you have in pre-retirement, the easier it will be to reduce or eliminate the shortfall. The ultimate goal of the process is to have a realistic set of retirement goals in place and an achievable action plan to get there.

At the end of the planning process, we have a written plan and set of projections in place and a much better understanding of where you are in your financial life. Hopefully, some key questions have been answered, and you’ve arrived at a level of comfort. A plan should give you information to make decisions; you should be prepared to take advantage of opportunities, adjust to a changing business climate and make decisions in line with your goals.

The planning process can also lead to reflection. Your priorities may change over time, so it’s important to keep your plan up to date. It is a living thing that needs to be reviewed from time to time to make sure it is evolving with you if and as circumstances change.

If you own a business or know someone who could benefit from our financial advice, we would be happy to assist.