Insights Into Financial Management: How To Get A Good Night's Sleep

William Canby, senior vice president, SunTrust Bank Private Wealth Management

August 27, 2008

B usiness owners have plenty to worry about, and a 2007 survey revealed what really keeps them up at night. The study, conducted by SunTrust Bank Private Wealth Management, delved into issues of the family and business, including those related to succession planning and transitioning the business to someone else.

Protecting and building wealth - and having enough money in retirement - were top personal financial concerns for survey respondents. Managing cash flow and transitioning wealth to the next generation were named as major concerns by nearly a third of participants.

Business owners often have one asset-their business-with which they are building their wealth. Typically, most of a business owner's personal wealth is invested in the business itself. It is a great asset, but there is little diversification. Diversification is an important part of formal planning, because it lessens reliance on performance of one or just a few asset classes. Tax minimization, business succession, transition, and legacy planning are other key elements.

Wealth planning starts with identifying goals, both individual and family. A goal can be personal or philanthropic. It can be multi-generational. It also is important to identify the goals of key stakeholders who are not family members, such as business co-owners.

The second step is to identify current resources available to you as the business owner to carry out your goals. Next, consider future resources to attain these goals if required. This includes identifying options for addressing potential issues in accumulating and sustaining wealth, such as ways to minimize taxes.

How an entrepreneur becomes a business owner does affect his or her approach to managing wealth. One clear factor is whether an owner is the founder or represents first-generation family ownership. Founders are constantly involved with their business. They closely intertwine personal and business wealth and view the business as their source of future wealth.

A fifth-generation owner may not be in a strong position of control due to dilution. For example, there may be shared ownership across multiple generations. Owners who are far removed from the founding generation tend to separate personal and business wealth and often have accumulated wealth externally from the business.

In terms of life cycle, first-generation owners typically are in a growth stage. Their personal liquidity closely ties to that of their business. Once a business reaches maturity, earnings need not be reinvested in the business as much. Cash flow can be used to build personal wealth, for example, through salary or capital distributions such as dividends and retirement plan contributions.

You might believe that you need cash flow or a liquidity event to start planning for the future. However, it's important to recognize that your business has value, and, consequently, planning has value in enabling you to monetize business wealth for long-term financial well-being.

Why focus on this sooner rather than later? It takes time to address the issues associated with succession, transition, and retirement. For example, identifying the constituents, addressing their concerns, and communicating your plan is an exercise in family governance. Early planning also can minimize the risk of financial uncertainty due to unforeseen events. The health issues that accompany aging, for instance, can prevent proper planning.

If you neglect to focus on wealth planning, you limit the impact you can have on your destiny. I've heard it said if you don't have a succession plan, your competitor will have one for you. That plan may include buying your business for less than its worth.

It can be challenging to think about the future, especially when, as an entrepreneur, you are investing all of your intellectual and economic capital into the business. With hard work, desire, and a formal planning process, you can create a path from business success to sustained personal wealth.