The Financial Playbook for Business Owners

By Travis Anderson, Managing Partner of TBH Advisors

As a business owner you wear countless hats, from CEO to customer service, often putting your financial well-being on the back burner. However, it’s crucial to remember that personal financial planning is just as critical for long-term success as a business plan.

To ensure a long-lasting legacy and stable financial future, business owners must have a personal financial plan in order.

Financial Playbook – Strategy #1: Diversify Investments 

While it’s tempting to reinvest every penny back into your business, it’s essential to build a diversified portfolio. Relying solely on your business for financial security is akin to putting all your eggs in one basket — an illiquid and, sometimes, volatile one. Diversify your portfolio by investing in non-correlated assets outside of your industry to mitigate risk. For instance, if you own a construction company, consider investments in sectors like technology or healthcare to avoid a concentrated exposure to construction.

Moreover, leveraging tools like 401(k)s or asset protection trusts can safeguard your investments from outside forces like creditors. At TBH Advisors, we’ll work with you to develop a personalized investment strategy that meets your unique needs as a business owner and properly addresses your risk appetite.

Financial Playbook – Strategy #2: Manage Taxes

Many business owners fall into the trap of unnecessary spending, leading them to buy things they don’t need that often depreciate — such as a new business vehicle where the tax deduction could end up being minimal. Carefully consider what will take your business forward versus what you think you need.

Beyond this common pitfall, the structure of your business plays a crucial role in maximizing tax efficiencies. Opting for an LLC or S Corporation structure over a C Corporation can significantly streamline your tax responsibilities and offer a more favorable tax treatment. Seek a trusted advisor to determine if you’re eligible to restructure or if another option is right for your unique business goals.

Another way to manage taxable income is by employing family members in legitimate roles within the business. This approach not only allows for a redistribution of income but also fosters a sense of involvement and contribution among family. Note, it’s imperative any family members employed are contributing to the business in a genuine way.

The benefits of offering matching contributions to 401(k)s and other employee benefits extend beyond the notable tax deductions. These practices are instrumental in boosting employee morale, reinforcing a positive workplace culture, and contributing to the overall success and sustainability of the business.

Financial Playbook – Strategy #3: Develop an Estate Plan

Estate planning offers a risk-free return for business owners. By planning effectively, you can ensure your assets are distributed according to your wishes while minimizing estate taxes.

With the gift and estate tax exemption set at $13,610,000 per person and $27,220,000 for married couples for 2024, you have a tax-efficient way to pass wealth down to future generations. Further, you can transfer assets by creating share classes for family members or establishing trusts. These measures have an added bonus of protecting assets with specific terms of use.

Financial Playbook – Strategy #4: Think About Succession Planning

Succession planning is not a one-time event but a continual process that involves multiple generations. It’s about preparing the next generation for leadership — whether an heir or a carefully chosen successor — and ensuring the business’s operational, wealth, and growth components are understood and managed.

Trust and education play significant roles in this process, allowing for a smoother transition. Early involvement and realistic discussions about the future of the business, especially in family-owned operations, are key to aligning expectations and ensuring continuity.

Before a succession plan is close to being in place, have honest conversations about the future of the business and its importance to subsequent generations to understand how they see their role. Understanding heirs’ perspectives on their roles and level of involvement will pave a clear path forward for either the descendent to begin learning the family business or to construct a new plan to ensure business sustainability.

Financial Playbook – Strategy #5: Plan for Retirement

While the sale of your business might be a part of your retirement plan, it shouldn’t be the only plan. Diversifying your retirement savings through 401(k)s and IRAs can ensure a steady income stream post-retirement, independent of the business’s success or sale. This approach safeguards against the unpredictable nature of business valuations and market conditions at the time of retirement.

While the day-to-day demands of running a business are undoubtedly pressing, neglecting personal financial planning can undermine both you and your business’s long-term success. This financial checklist is only the surface. For a more in-depth plan, Contact TBH Advisors.