By Rich Best

Once in business, and as their earnings increase, many business owners begin to make decisions about their financial future that will set them on an individual course largely determined by the consequences of their actions, or inaction. And, for successful business owners, the stakes are even higher with little room for mistakes. Mistakes made early on in their planning can become obstacles to wealth accumulation that grow increasingly insurmountable in a shrinking time horizon.

Mistake #1 – Not having a serious retirement plan

The first mistake many business owners make is to assume that they can wait until their prime earning years to start thinking strategically about their retirement. The problem is that the shorter the time horizon for planning and investing, the more costly it is to accumulate the necessary capital. Either you will have to be able to set aside a larger amount of money each month, or you will have to take greater risks in your investing, or a combination of both. The sooner you can begin to set aside savings for retirement, the less it will ultimately cost.

Mistake #2 – Not utilizing the right retirement accounts

The good news is that business owners have several retirement plan options available to them. The bad news is that it does take a bit of time to explore them to determine which option is most suitable for their business and their personal needs, and time is a limited commodity for most business owners. Without the proper guidance, many business owners either make the wrong choices or they simply avoid making a choice at all, forgoing the tremendous benefits of a qualified retirement plan.

Mistake #3 – Not having an asset allocation strategy

Central to any long-term investment strategy, regardless of your risk comfort level, is the mix of your assets. The practice of asset allocation seeks to achieve the optimum mix of assets (including your business) that will generate stable returns linked directly to your long-term investment objectives. For business owners who plan to convert their business into equity, they need to include their business as an asset class in order to achieve the proper balance of risk assets in their portfolio.

To achieve an optimal asset allocation, many business owners will gradually divest themselves of partial stakes in their business – through selling shares to an Employee Stock Option Plan, family members, or third-party investors – while maintaining a majority stake for control.

Mistake #4 – Not having an exit strategy

Business owners who plan to eventually sell their business need to have a well-conceived exit strategy, without which financial disaster on a number of levels can occur. Not having an exit strategy can result in an unsuccessful outcome in the sale of your business, and worse, it can put the financial security of you and your family in jeopardy. Your exit strategy should be developed well before the time you plan to sell your business, and it should include an integrated plan that considers all aspects of your financial future, including the following:

  • An assessment of your options for taking cash out of the business (all out or deferral), including all tax implications.
  • An investment strategy designed to generate sufficient income while growing your assets
  • A risk management plan to protect against risk exposures, such as death, disability, personal liability, life longevity (the possibility of outliving your income and critical illness)
  • An estate plan for preserving and transferring assets with minimal cost to your family
  • A power of attorney and medical directives in the event you become incapacitated and unable to make financial or medical decisions

Business owners with any ambition of retiring on their own terms need a fully integrated retirement plan that considers all aspects of their business and financial lives. It may seem like something that can wait until you’ve built your business, but the cost of waiting can get prohibitively expensive. Business owners need to manage their personal finances as they would a business – with the same strategic mindset and the same urgency for planning.

Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank.