On April 15th, 1912 the unsinkable Titanic sank in the Atlantic Ocean.
It was reported that as the ship took on water the show on board went on. The pianos continued to play and the servers tended to dinner requests. This led to the catastrophic events that followed.
These events happened due to a lack of preparation. The Titanic left port with enough lifeboats to hold 1,178 people. The Titanic carried 2,224 passengers.
Risk management for business owners is how you avoid being the Titanic.
There are many components to wealth management for business owners but none more important than managing risk. Without the proper risk management strategies you could be a sinking ship.
In this blog, we are going to look at how to identify and take action on risks in your life.
Risk Management for Business Owners
Risk management for business owners is a topic that is often neglected. It isn't sexy and only matters once the fire has already started.
Moment Private Wealth helps clients see around the corners to protect themselves from big and small risks that they don't know exist.
Today we are going to look at six real-life examples that could sink the ship. These types of risks show up in two flavors.
Business Boat Sinkers
Personal Boat Sinkers
Let's dive in.
Business Boat Sinkers
Your business is the lifeblood of your balance sheet. It has taken a decade for you to become an overnight success and it could take one wrong move to take it all away. Let's look at the real-life examples we are going to explore today.
Business Boat Sinkers:
Forced to Sell Your Business
Lawsuit Crushes Your Business
Taxes Force G2 to Sell the Business
The single best way to protect against risks that you are unaware of is to get educated. I see far too often owners bury their heads in the sand hoping that nothing will happen. These are the business owners who find themselves in trouble when the unthinkable happens.
Each one of these situations is a nightmare to deal with, but thankfully there is a solution to protect you from each of these events.
Business Boat Sinkers
Situation 1 - You are forced to sell your business.
Example
You have been building your dream company for decades. You have built an amazing team and business with your business partner. One of you focuses on the vision while the other keeps the train on the tracks. One day your business partner informs you that he has a terminal illness. Later that year he passes away. Unfortunately, you do not have the capital to buy his shares of the business from his spouse and are forced to sell your business.
Solution
The most common solution is to execute buy/sell insurance. This is an insurance policy that is intended to pay out in one partner's death to buy his or her shares.
What Should You Do Today
The first thing you should do is pull out your buy/sell agreement and read it. If you don't have one you should reach out to your advisory team to coordinate having one drafted. If you do find it you should ensure you understand what it says and how it is funded. If it is not clear to you reach out to Moment to get a second opinion.
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Situation 2 - A lawsuit crushes your business.
Example
You are running a high-growth HVAC company. What started in your basement is now a multi-million dollar business. As you grew the business you focused on the main thing ~ growing revenue and serving clients. Unfortunately, you never looked at your commercial liability coverage until it was too late. Your company installed a hot water heater incorrectly at a home and it burned to the ground. Fortunately, no one was home but the homeowner is bringing a lawsuit.
Solution
Your business isn't stagnant. The proper liability coverage needs to be reviewed on an annual basis to ensure it is growing as your business is growing.
What Should You Do Today
The first thing you should do is pull out your commercial insurance coverage. You should review your liability coverage to ensure you are properly covered. If you have questions your first point of contact should be your insurance agent or advisory team. If anything is unclear reach out to Moment to get a second opinion.
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Situation 3 - Your tax bill forces the next generation to sell the family business.
Example
Your little startup is now an enterprise. Your goal has always been to pass the businesses down to the next generation. You believe you have covered all your bases. You spoke with your corporate counsel. You have executed a succession plan with your kids, but you never considered estate taxes. One day you suddenly pass. At that time your business has been valued at $50,000,000. Without proper planning, this leaves you with a $15,000,000 tax bill at your death. The only way to pay this tax bill is for the next generation to sell the family business.
Solution
Proper estate planning will avoid this situation. Often times the best solution is to have a life insurance policy in place to pay your estate taxes. You can learn more about estate planning for business owners here.
What Should You Do Today
The first step is to pull out your personal financial statement. A recent one you have sent to your bank for lending should work. Time to calculate your net worth. This should include the value of your businesses, real estate, and all liquid assets less any debt. If your total net worth is over $13,610,000 you have this problem. I would recommend reaching out to your estate planning or advisory team to discuss the best next steps. If you aren't confident in the answers you are getting you should reach out to Moment Private Wealth for a second opinion.
Risk isn't always a fun topic to discuss. It normally requires facing all the things that could go wrong. Don't wait until it is too late. If you are a business owner ensure your risk management plan avoids these business boat sinkers.
Personal Boat Sinkers
I want you to open up Google. Type in your name and the city you live in. On the first page of Google, you will likely find your name and the name of your company.
Unfortunately being a business owner has put a target on your back. The more success you have the more you have to lose. These are three common personal boat sinkers we see impact business owners.
Personal Boat Sinkers:
Personal Lawsuit Costs You Millions
Family Loses Your Income
Creditors Take Your Assets
Although these situations aren't fun there are many ways to protect yourself from getting in hot water.
Let's dive into each.
Situation 1 - A liability lawsuit costs you millions of dollars.
Example
You are a busy entrepreneur. This doesn't stop things from breaking at your house. One day your roof is leaking and you text your neighbor to see if they have a recommendation. They send you their "guy" who is an expert and is a low-cost provider. This "guy" shows up at your house pops on your roof and slips. Fortunately, he only has a broken leg, but after googling your name he decides to sue you. Little did you know that he has no business insurance.
Solution
There are two key ways to protect yourself from these instances. The first is to ensure your home liability coverage has the proper coverage. Typically we see this being $500,000 of personal liability coverage. The next layer is an umbrella policy to protect you in the event of excess liability.
What Should You Do Today
You will need to find your property and casualty declaration pages. If you are a Moment client you can find these in your vault on our mobile app. If you can't find these documents reach out to your insurance agent. They will provide you with a document for your home, auto, and umbrella. You are looking at your total personal liability coverage. If this number is lower than your total net worth it is time to have a conversation.
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Situation - A family loses the income to fund their lifestyle.
Example
You have done the hard thing. You quit your W2 and started a business. During this time your income has grown to the point that your wife can stay at home with the kids. It is an amazing feeling to be able to support your family and allow them to have a great lifestyle. This is the first step in your business, but your business still relies on you working in the business. Unfortunately, you suddenly pass away and your income goes with you.
Solution
The simplest way to protect your family from loss of income is life insurance. Typically we see term insurance as the most cost-effective way to protect from this tragic event occurring.
What Should You Do Today
You should first review your current coverages. Ideally, your current life insurance coverage should be able to replace your current income need and pay off all debt on your balance sheet. This is more of an art than a science. Once we have determined how much coverage is needed we will provide quotes for the additional coverage recommended. This will allow your family to get educated on how much insurance you need and at what cost.
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Situation - Creditors take the assets you have passed to the next generation.
Example
You have spent your entire life protecting your family. Part of your plan was an estate structure to protect your assets. After you pass away your children receive all of your assets. One important detail you left out was a co-trustee for asset distribution. Unbeknownst to your son he needed to leave his assets in life trust to keep his creditor protection. After a failed startup venture the creditors can access the funds you passed down to him.
Solution
In order to receive creditor protection your assets need to be in life trust for your kids. This can be an easy win but needs to be set up and communicated to the next generation.
What Should You Do Today
When you had your estate plan drafted you should have received an estate plan flow chart. On that flow chart, you are going to try to identify if your assets are going directly to your children or heirs. If setup properly there should be a trust that is created for each one of your children at the time of transfer. If you aren't sure how to identify this I recommend you reach out to your estate planning attorney or Moment for a free review.
Life as a business owner is full of obstacles that can sink your boat. The best way to ensure that your boat is ready for the open ocean is to inspect it regularly. Financial planning for business owners should be the same way. A review of your risk management plan on an annual basis should be part of this process.
So remember, getting educated is only the first step in protecting yourself. Take action today and ensure you don't have personal or business boat sinkers in your life.
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Our goal at Moment Private Wealth is to help you avoid these common mistakes. This is why we help with risk management for business owners. It isn't enough to know what tools to use but you need a team to help you implement.
If you are an entrepreneur who is concerned about a potential risk, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and entrepreneurs. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. For most of our clients, their team consists of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
How do you choose investments for clients? As independent financial advisors, we can gather research and make recommendations based on all available options. We determine clients’ portfolios in partnership with some of the largest asset managers in the world. Each quarter, we have calls with teams of CFA (Chartered Financial Analysts) to ensure our clients are receiving the most up-to-date strategies and recommendations.
What does your average client look like? Our clients are nearly all athletes and entrepreneurs. Our average client has a net worth greater than $10M. The strategies, solutions, and planning that we implement have a high-net-worth and ultra-high-net-worth client in mind.
Why should I consider hiring Moment Private Wealth? Great question! But first, let us explain why you shouldn’t hire us. If you’re looking for an advisor who will pitch shiny object investments or be a “yes man” you are in the wrong place. Why? Because we believe in being truth tellers and only giving advice that we take ourselves. The investments, strategies, and planning we do are all things our advisors do with their own money. If you are an athlete or entrepreneur interested in things like lowering your tax bill, investing smarter, and finding a trusted partner we might be a good fit.
Does Moment Private Wealth sell insurance? Moment does not sell insurance but advises on all insurance for clients. This allows us to be free of conflicts when recommending certain types of insurance products.
How do insurance agents get paid? Insurance agents are paid a commission based on the type and amount of a product you purchase. It is our advice that you always ask the agent to list out their commission for any product you are considering.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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