Put out fires or prevent them? Small business owners struggle for balance

Small business is the engine that drives the U.S. economy, accounting for 65 percent of all net new jobs created in the past two decades and employing 61 million people. The challenge for owners is balancing short-term demands with long-term planning.

“Today’s business owners are spending the majority of their time working in their businesses instead of on their businesses,” according to the MassMutual Business Owner Perspectives Study.

“The reality for today’s business owner is that long-term planning is not always top of mind, even though many feel protecting the business is important. In addition, most business owners prefer to keep their business and personal finances separate but often find the two inextricably linked.”

The study identified several long-term concerns of small-business owners:

Protecting the business from the disability and/or death of the owner or key employee. These two concerns are equally important, with more than 60 percent saying each is top of mind. The issue lies in the actual planning that’s been done – or not being done. Only 32 percent of respondents have a buy-sell agreement in place. Fortunately, 80 percent of business owners say they have established an emergency fund to weather future challenges, with 65 percent of them saying the money would last between four and 12 months.

Business owners should ask themselves this important question: If you died 90 days ago, what would your business be worth today? A buy-sell agreement should be drafted to protect the business from the six Ds — death, disability, divorce, departure, default and disqualification.

Pulling out the wealth that’s locked in the business upon exiting. The primary goal for survey respondents when they exit their businesses is to maintain their current lifestyle in retirement. This is evidenced by the fact that nearly two-thirds said they will exit only when the right buyer comes along or their future financial security is assured.

There are two types of business owners — lifestyle owners and value creators. A lifestyle owner is comfortable with the state of the business as long as it supports their current lifestyle and meets their income needs today. In contrast, the value creator prioritizes growing enterprise value over income, realizing that when business value grows, income will be there for today and tomorrow. In an effort to extract the wealth that’s locked inside the business, they know how much it can realistically contribute to their future income, choose an exit strategy that is aligned with their personal financial goals and take the necessary steps to build an asset that is transferable.

Being fair and equitable regarding the distribution of assets form the owner’s estate. Estate planning is of much higher importance when positioned in terms of a fair and equitable distribution of assets as opposed to the handling of estate taxes. Although nearly 60 percent of business owners believe it’s a concern, fewer than 30 percent have what’s called an “estate equalization” strategy.

When it comes to dividing up ownership in the family business, fair does not always mean equal. More than half of business owners say they either plan to divide the ownership in the business equally among all children regardless of their involvement or will let the children figure it out themselves.

Transitioning ownership and/or finding a buyer upon retirement. Transitioning ownership when the business owner is ready to retire is ranked last in terms of importance and priority. This is not surprising when considering that nearly half of business owners surveyed either plan to work in their businesses beyond 10 years from now or have no idea when they plan to retire.

However, more important than when business owners will retire is how business owners will fund that retirement when the time comes. Fewer than half believe they are on track with where they want to be with their retirement savings and say it will be an almost even split between funding retirement with both the business and assets outside the business.