Many people start a business with dreams of getting rich – which is not necessarily unrealistic. Roughly 88% of millionaires are self-made, meaning they did not inherit their wealth, but instead earned it through entrepreneurship or other means, according to research from Fidelity Investments. But getting wealthy does not happen overnight, especially for entrepreneurs known for their risk-taking ability and innovative mindset.
Wealth management for entrepreneurs involves a comprehensive approach to handling personal and business finances, focusing on growing, protecting, and efficiently utilizing the wealth generated through entrepreneurial ventures. It differs from traditional wealth management due to the unique challenges and opportunities entrepreneurs face.
“Research suggests that financial literacy gaps impact wealth, and individuals who actively engage in comprehensive financial planning tend to achieve better long-term financial outcomes compared to those who do not,” says Charmaine Green-Forde, Founder and CEO of Chapter Too, an organizational and leadership development company.
Let’s look at five strategies entrepreneurs can use to build and manage their wealth so they can achieve their goals.
1. Diversify Beyond the Business
“Entrepreneurs often have most or all of their wealth tied up in their businesses. While reinvesting in your business can be a powerful growth strategy, it's equally important to avoid having all your financial eggs in one basket,” explains Todd M. Villarrubia, founding partner of Wealth Planning Law Group. You never know when something out of your control, like a global pandemic, can completely disrupt your business plans, jeopardizing everything you have worked so hard for.
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“To mitigate risk it’s important to invest in a diverse portfolio that includes stocks, bonds, real estate, and possibly other businesses so that they are roughly equally weighted. This not only protects your overall financial health from the volatility of your business sector but also ensures steady growth through other channels,” says Villarrubia.
2. Cash Flow Management
“If you want to build and effectively manage wealth, the first and most important step is to gain full awareness of your financial position. This involves assessing your assets, liabilities, income, and expenses — including potential inheritances,” says Green-Forde.
“Entrepreneurs often face the challenge of managing irregular and unpredictable income streams. Understanding how to manage cash flow is vital to ensure that an entrepreneur’s business and personal finances remain stable and can support growth,” says Villarrubia. “Implement robust cash flow management strategies. Start by maintaining a clear separation between personal and business finances, establishing an emergency fund to cover fluctuations in income, and using forecasting tools to plan for future cash needs. Regularly monitor and adjust budgets based on business performance and personal financial goals.”
Looking ahead and planning is crucial. “Apply for a line of credit or a loan when you don't need it. The chances are, your numbers look a lot better when you are not in need of those. This means you will likely get a better deal, such as more funds or lower interest. Having access to these can bring peace of mind. Also it helps build business credit. Debts can be viewed as a negative thing, but in business, it can be neutral and used as a tool,” adds Maiko Sakai, Founder of Airtight Concepts Inc., a business strategy firm for small businesses.
3. Retirement Planning
Over one-third of entrepreneurs lack retirement savings, according to a report from SCORE. Without adequate planning, entrepreneurs can find themselves needing to work long past retirement age instead of living out their retirement dreams.
“In the midst of building and running a business, retirement planning often takes a backseat for entrepreneurs. However, unlike traditional employees, entrepreneurs don't have the benefit of employer-sponsored retirement plans. It’s important to treat yourself like an employee, even though you’re running a business. Work with a professional to create a retirement plan that will secure your future,” says Villarrubia. Entrepreneurs and business owners often seek guidance from CPAs, attorneys, and financial advisors, who might not always be fully versed in the nuanced, advanced planning strategies that can significantly impact long-term financial success. This includes leveraging options such as Cash Balance Plans, Prosperity Plus programs, and employing life insurance in ways that provide tax benefits and enhance retirement savings. Particularly for those in their 40s to 60s, exploring these less conventional paths could lead to substantial tax deductions.
4. Succession Planning
Every entrepreneur will eventually face the question of what happens to their business when they retire, become unable to run the business, or pass away. “The time to plan for the future of your business is now. Take the time to develop a clear succession plan that defines what will happen when you need to step away from the business permanently. This might involve grooming a successor, setting up a buy-sell agreement, or planning for the sale of the business. Ensure that this plan is legally sound and aligns with your personal wealth management goals,” says Villarrubia.
Estate planning is part of succession planning. “For entrepreneurs, estate planning is not just about deciding who will take over the business. It encompasses a broader strategy to ensure that all business and personal assets are distributed according to the entrepreneur’s wishes upon their death. This process involves legal documentation such as wills and trusts, which dictate the distribution of assets and can help minimize taxes and legal hurdles for heirs,” he adds.
5. Asset Protection
“Entrepreneurs are often more exposed to legal risks than regular employees. Lawsuits, business debts, and other liabilities can threaten personal assets. Use tools to protect personal assets from business liabilities. It’s crucial to separate personal and business finances and to have adequate insurance in place,” says Villarrubia.
Wealth management for entrepreneurs is not just about growing wealth but also about protecting it, ensuring its longevity, and aligning it with personal financial goals. These strategies require a balance of financial acumen, foresight, and the willingness to seek professional advice when necessary. Effective wealth management is a continuous process, requiring entrepreneurs to continually adapt to changing business landscapes and personal life stages.
