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The Benefits of Financial Planning for Small Business Owners

, CFA®, CFP®

01/13/2025

5 minutes

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Small businesses aren’t as small as you may think. According to the U.S. Chamber of Commerce, small businesses drive 44% of the country’s GDP, and employ more than 60 million Americans. Even so, small business owners often forego financial

planning—sometimes until it’s too late.

78% of business owners plan to fund their retirement through the sale of their business, but 60% haven’t even met with a financial advisor yet, according to BizEquity. This represents more than just a mismatch in mentality; it’s a strategic pitfall that can have drastic results on a business owner’s retirement.

Financial planning is a crucial component of long-term success. Small business owners can design their plans to create steady retirement cash flow, plan for growth, and prepare for unexpected challenges.

In this article, we’ll explore the fundamentals of financial planning for small business owners, and how you can implement these strategies for yourself.

Why is Financial Planning for Small Business Owners Important?

Financial planning for small business owners involves creating a structured, integrated plan for managing their business and personal finances holistically. From making strategic business decisions to setting clear and achievable personal goals, financial planning can offer a roadmap toward growth, and steer you away from potential risks.

For small business owners, financial planning is essential for three core reasons:

  1. Steady cash flow. Business owners understand that cash flow is the lifeblood of a business—and that poor cash flow management can lead to premature business failure. In their personal lives, financial planning can help owners predict their cash needs, balance income and expenses, and illuminate opportunities for liquidity (more on that later).
  2. Preparing for growth. Business value often makes up the majority of its owner’s net worth, especially as the business grows. While diversification is crucial, and will be covered in this article, identifying pathways for an owner to grow the value of their business can offer a direct path toward financial confidence.
  3. Managing risk. As we alluded to above, concentration risk is real for business owners. Shifts in market dynamics or personal situations can cause an owner’s financial situation to change rapidly. Financial planning can create buffers to manage these risks.

With a carefully crafted financial plan that is integrated with their business, small business owners can make more informed decisions, both personally and professionally.

Schedule a complimentary review of your financial plan with Wealth Enhancement today.


Integrating Personal Goals and Business Goals

It would be disingenuous to a business owner’s financial reality to treat personal goals and business goals as entirely separate. While it’s critical to consider them carefully in their own right, the two are often intertwined.

Effective financial planning for small business owners considers how personal goals, such as planning for retirement and future legacy, aligns with business objectives like expansion, increased revenue, or planning for a transition.

  • Personal goals. Small business owners often have specific personal goals, such as building generational wealth or funding specific retirement lifestyle goals. Aligning these goals with the financial aspects of the owner’s business can help them keep track of growing their personal wealth alongside the company’s success.
  • Business goals. Typically focused on areas like growing your multiple, increasing profitability, and crafting an eventual transition, business goals can be integrated with personal financial plans to create a well-rounded path toward financial freedom.

A financial planner can work with a business owner to set milestones for both their personal and business lives, creating a clear path forward toward aligned objectives.

Effective Asset Diversification for Small Business Owners

Asset diversification is a critical strategy in managing risk and increasing potential outcomes for business owners. Effective diversification isn’t just about spreading investments across different asset classes; it’s also about choosing the right types of accounts to optimize tax efficiency.

Understanding how tax treatments affect your personal assets is crucial for preserving your bottom line. Here’s an overview of the different account types:

  • Tax-deferred accounts for small business owners, such as a SIMPLE IRA or 401(k), allow earnings to grow tax-free until withdrawals are made. This can be especially beneficial if the owner expects to be in a lower tax bracket in retirement.
  • Tax-advantaged accounts, like a Roth IRA or Health Savings Account (HSA), offer tax-free growth and withdrawals after paying tax on the deposits, which can help reduce liabilities in the future.
  • Taxable accounts, like brokerage accounts, allow funds to be accessed without age restrictions, which can help small business owners bridge cash flow gaps and pay for unexpected costs on the road to retirement.

By diversifying among taxable, tax-deferred, and tax-advantaged accounts, small business owners can balance immediate cash flow needs with future retirement plans. Strategically allocating your assets based on the different tax treatments can provide substantial tax savings over time—savings that can be reinvested to support both personal and business financial health.

But with so much of their net worth tied to their small business, what opportunities do owners have to create liquidity? In the following section, we will explore basic strategies that business owners can use to monetize their businesses without an outright sale.

Business Financial Plan Strategies: Liquidity and Monetization

Opportunities for business liquidity allow owners to gain flexibility in their personal financial plans. Here is a brief list of some ways that small business owners can diversify away from their business as their primary financial asset:

  • Strategic partnership or partial sale. The owner sells a portion of their business to a buyer with shared goals.
  • Minority or majority recapitalization. The owner brings in an investor without ceding full control, accessing capital that can be pulled from the business and invested elsewhere.
  • Employee Stock Ownership Plan (ESOP). The owner transfers ownership to the business’s employees, which can provide significant tax advantages.

Each of these options has unique tax and cost implications. For example, recapitalizations and ESOPs offer potential tax benefits when structured carefully, and can become powerful engines for owner liquidity. However, when considering or pursuing any of these strategies, it is critical for owners to work with an experienced team that has a deep understanding of your personal wealth plan.

Planning for The Future You Envision With a Financial Professional

At its core, financial advising for small business owners is about planning today so you can unlock better opportunities tomorrow. A comprehensive advising team that is well-versed in helping business owners plan for the future can help you forge a clear path towards your goals.

Every Wealth Enhancement advisor is backed by our Roundtable™ of specialists, offering experienced advice across all aspects of the financial advising spectrum. If you’re a small business owner who’s ready to take the next steps, please reach out to schedule a complimentary review with our team today.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk, including possible loss of principal.

#2024-6101

Senior Vice President, Financial Advisor

Houston - San Felipe, TX

Steven brings 15 years of experience in the financial industry, including roles in commercial banking, insurance, and tax preparation prior to taking on investment management responsibilities in 2012. As Chief Investment Officer of The Financial Advisor Group, he led the firm's investment research, asset allocation, and trading activities before bringing his skills to Wealth Enhancement Group in 2024.

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