5 Stages of Small Business Ownership and Tips for Navigation
My financial planning firm is focused mainly on supporting active, 🏋🏾♀️ energetic female executives and entrepreneurs. For this month’s blog post, I’m going to share with you some important considerations for small businesses. We’ll talk about the pre-launch phase, start-up, growth, and transitioning phases of your business.
Entrepreneurship! 💪🏽
Let’s start by saying, deciding to start your own business is scary, and daunting, and unfortunately, it is really difficult to find helpful ‘user manuals’ if you will. While this blog is not meant to be all encompassing, I do hope that what you’ll take from it is the need to surround yourself with the appropriate subject-matter experts, mentors, and advocates, so that you’re not starting or running a business alone. 👏
Business ownership, like a family, ‘takes a village’ to manage and grow 🌱 – and I’m a huge proponent of finding your ‘Board of Advisors’ as I like to call them. Your own Board may consistent of a Certified Financial Planning Professional (like me), an attorney, a bookkeeper, and accountant.
Phase 1: Pre-launch of your business
You have an idea and the energy ⚡️ for starting your own business. You do not need to be 100% 💯 ready before you launch, but there are a few important items that I find indispensable:
Business structure.
Are you going to be a solo-proprietor or work with a partner? I highly recommend visiting with a small business attorney who can help you draft the legal documents and structure necessary to protect your personal/family resources in the event of a legal problem. There are plenty of online resources out there, however, I always steer my clients to work with an attorney to draft the appropriate legal documents. Some legal entities include LLCs (limited liability corporations) as well as S and C-corps. Make sure you have the funds (likely a few thousand) to dedicate to appropriate legal guidance before you launch.
2. Register your business.
The Small Business Administration has a wealth of resources to refer to as you determine if you must register your business with Federal, State, or Local agencies. In many towns, when you go to register your business, they will check that you’re up to date on your personal tax payments. (Your business entity is often tied to your personal finances – so if they are not in order, you may have some cleaning up to do before starting your business).
3. Liability insurance. 💥
In the service sector, we often require E&O insurance (errors and omissions) – and this can be a large expense item – so be sure to budget accordingly. If you have a bricks and mortar business, or sell physical products, there are other insurance coverages that may be appropriate for you. This is something you do not want to skimp on – and I recommend working with a property and casualty insurer for this coverage.
4. Business bookkeeping. 🧾
Way too often I find small business owners mix their business and personal accounts. They may also be missing out on deductible business expenses if they are not familiar with business bookkeeping strategies. Whether you need to hire a bookkeeper may depend on how many expenses and invoices you need to keep track of to start, but at the least, I would encourage you to pay for a class or a book. It is much easier to manage business finances if you have a business account, separate from your personal one. As you grow, you will decide how to take a salary or distributions from your business, and you will most likely send them to your personal account.
5. Business accountant. 👩🏻💻
There are many types of tax and accounting professionals to choose from. Personally, I lean more towards more proactive CPAs, who can not only reactively file your tax return, but who can also be proactive in terms of helping you save on taxes and growing your business/personal wealth. Here is the perfect example, I have had many conversations with small business owners who want to MAXIMIZE deductions to reduce taxable income, when that may not be the best solution for their long-term personal financial planning. It is also very important that we (your financial planner and tax/accounting professional) be in communication so that we can devise appropriate strategies for your unique situation. Of course, I’m required to caveat by saying I’m not an accounting professional, so be sure to always consult with yours before making any decisions.
Phase 2: New business (years 1-3)
At this point in your business lifecycle, you are establishing your business as a leader in your particular market. You’re also working towards profitability. Some issues to consider include:
In addition to the liability insurance we mentioned above, key-person insurance may be important in this phase, especially when the business is reliant on one more more key players to keep functioning. The business may own life insurance policies on the key players, that would pay a benefit upon early demise or departure, back to the business. This allows the business to continue to function as a going concern. Disability insurance works similarly – if a key person is unable to perform their daily functions 🤕, the business will receive a monthly income which allows for expenses to be paid, and possibly interim hires while awaiting the return of the key person.
2. Group benefits.
Does it make sense to offer group medical benefits, retirement savings options, or other benefits at this point? Business owners should consider their options at this point.
3. Personal life and disability insurance.
Owners/key employees should also explore layering additional personal coverage to supplement any group coverage they may have implemented for the business as a whole.
Phase 3: Growing business (3+ years of operation 👏👏)
Now your business is in major growth mode. You may have need for debt 🏦 financing to grow, and you may still be significantly reinvesting in your business. Your client base is growing, and your needs for key person retention packages may become more important.
Buy-sell agreement and funding review.
At this point, it may make sense to have an official firm valuation done, which will provide you the appropriate values to confirm your protection needs. A buy-sell agreement is a legally binding contract stating how one key person’s share of the business is reassigned if that key-person dies or leaves the business prematurely. There are several types of agreements that may be appropriate for your business.
2. Overhead expense disability insurance.
Ditto the prior phase and needs for protection, but may even more so, now.
3. Group benefits. 👩👩👧👧 👩🏻🦽
If you haven’t already started offering group benefits, you will want to consider them now. This will help you attract and retain employees.
4. Owners/key employees additional considerations.
Depending on the desires of the owners, there are other types of benefits allowed for carve-out 🔪employees only – such as bonus plans and non-qualified deferred compensation plans or additional insurance coverage.
Phase 4: Established business (10+ years of operation)
While we use 10+ years of operation as a guideline, many of the small businesses I work with are reaching maturity much quicker. No matter how long it takes you to feel established, you typically have an experienced management team in place, have a mature client base, and see consistent revenue and cash flow. At this stage, we want to consider the following (in addition to all prior points):
Expanding group benefits.
Let’s get creative. Can we offer more/flexible vacation time? What about maternity/paternity/adoption/IVF benefits? I’ve also seen companies offer lactation benefits – such as helping breastfeeding mothers 🤰🏿 ship milk when travelling (see, for example, www.milkstork.com – I know I would have LOVED this benefit when I was nursing – and it can be key to retaining your women! Hint, hint for all those DEI execs reading this.)
2. Key person retention review and plan.
When you have good employees, you may consider doing everything in your power to retain them. Check in regularly with them as to what is important for them at that moment. More vacation, flexibility, income, access to certain projects, etc? Don’t consider this a ‘one and done’ check-in – do it periodically – as your employees’ needs change, along with the business and market cycle.
3. Inheritance equalization planning for family-owned businesses.
Does your small business have family members involved? Are there other children NOT involved? Discuss estate plans with your trusted advisors, to be sure to take them all into account, and equalize where desired and necessary.
Phase 5: Transitioning business 🚵🏽♀️
When you start your business, it is already important to have an end in mind. I see so many small business owners who say that their ‘retirement’ plan is to sell their business. However, the optimum market cycle does not always magically appear at the time you desire a sale. Sometimes it makes sense to transition sooner, OR later, depending on the market for your particular goods or services as well as to your own personal financial plan and goal achievement.
Review/update business valuations, and buy-sell agreements, and ensure proper funding is in place for owners.
As discussed above, these agreements attempt to smooth transitions in the business, due to death or departure of key employees. They should be reviewed periodically to ensure appropriate levels of coverage.
2. Employee stock ownership plan (ESOP).
These plans allow employees to purchase shares of company stock – incentivizing them to stay and perform for the company. There are other types of employee ownership programs, but the ESOP is one that many people are familiar with.
3. Evaluate the financial impact to the business if key employees transition 💸.
This argues for having well-diversified leadership throughout the lifecycle of your business, so the departure of one key-employee does not impact the health of the business. It is important to cultivate future leaders regularly, not just the few years prior to a departure.
4. Estate🏠 inheritance equalization.
Review your personal estate planning needs for any tweaking (this is important for everyone, not just business owners).
Et voila. This primer was not intended to be all inclusive, but rather to provide small business owners with information regarding important aspects of running a small business that they may want to consider before they launch, as well as while they are growing and even transitioning.
As I mentioned at the beginning of this article, I’m a huge proponent of small business owners having their own ‘Board of Advisors.’ The earlier you establish a team who is proactively supporting you and your business growth, the more access you’ll have to advisors to cheer you on and help you adjust when/where necessary.
I’d be honored to help you with your small business needs and know that I’m rooting for you, especially my female business owner clients. Please schedule time to chat today. And thank you to Principal for great info on planning for business owners.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.