Helping business owners recognize the value of a wealth plan

by Caroline Dabu
Head, Wealth Planning and Advisory Services, BMO Private Wealth

Business owners are helping to propel Canada’s economy. Statistics Canada reports privately-owned businesses employ 1.4 million Canadians, with over 580,000 of them working for owners who have a staff of fewer than ten people. But while they work to build their ventures and boost their community’s growth and economic well-being, business owners often neglect their personal wealth and related long-term goals as they journey through the various stages of their personal and business life cycle.

While we highlight and honour business owners this October for Small Business Month, it’s also an excellent time for investment advisors and planners to take stock of their business client’s needs. As well, if they have not already, they can introduce the value of building a solid, holistic wealth plan to their clients as their business grows and their families mature.

Personal goals versus business goals
Owners of a private business constantly face the difficult challenge of balancing the needs of their business with the needs of their family. There are trade-offs in time and financial commitments that business owners must constantly make as they strive to generate the reliable business earnings and growth that will help them achieve their own financial goals.

A wealth plan allows a business owner to make the most of their assets; it helps protect their assets and ensures that their wealth ends up in the right hands. An effective wealth plan employs tax-efficient strategies in every area of their financial dealings, plans for a comfortable retirement, factors in the unexpected, and takes care of loved ones – now and in the future.

The wealth plan
A goals-based holistic wealth plan addressing both personal and business objectives focuses on the bigger picture by implementing customized strategies to achieve three primary wealth goals – accumulation, preservation, and distribution – while at the same time working to ensure family harmony in conjunction with an intergenerational transfer of wealth. The implementation of a wealth plan and the achievement of primary wealth goals are enabled by engaging a financial planning process that clarifies goals, establishes expectations, and decides on solutions and strategies.

Wealth planning for a business owner should also include personal financial planning alongside planning for the business. Business and personal financial plans have very different focuses, but for the business owner it is very important that the two plans work together.

Key areas of focus in the personal financial plan of a business owner
Cash management
Businesses in the start-up phase tend to have high capital investment needs relative to the amount of revenue that the business is able to generate. Access to investment capital and the reinvestment of earnings in the business may compete with the need for cash flow to support personal and family needs. The income of the business should finance day-to-day business operations, but it will also be needed to fund the lifestyle, daily living expenses, and savings for other goals of the business owner and their family – as well as managing debt.

Tax planning
Minimizing taxes is a major factor contributing to an efficient cash management approach. Business owners benefit most when personal and business taxes are considered in combination. It’s important to consider the right structure for the business to maximize tax efficiencies, but also to protect the business owner and the assets they have accumulated within and outside of the business.

Investment planning
A successful investment strategy begins with asset allocation. However, for a business owner, diversification from the business is a key consideration. As most of an owner’s financial assets are tied up in the business, the achievement of other financial goals is dependent on saving and investing outside of the business in accounts such as a Tax Free Savings Account (TFSA) or Registered Education Savings Plan (RESP), or in a personal holding company.

Insurance planning
Determining the best method to protect the business owner, their family, and the business requires specialized knowledge of risk and of insurance-based strategies. In some circumstances it may be advantageous for insurance to be held by the business rather than personally. Health-related risks that can be mitigated through the use of insurance include the risk of the business owner becoming disabled, suffering a critical illness, or dying.

Retirement and Succession planning
Business succession planning deals with two primary components: the transfer of ownership involving legal and tax structures and related components, and the transition of management involving risk management and business continuity. The former involves technical or procedural items, while the later involves emotional items which are often initially overlooked but require time and attention.

Effective communication is fundamental in the process; it ensures understanding of the different perspectives / expectations of individuals in the three inter-related systems that make up a family enterprise (Family, Management, Ownership). These are key for a successful transition and the maintenance of long-term family harmony. 

It is important to have clients start business transition and succession planning as early as ten years before the planned exit in order for the transition to be most successful. This will allow time for the owner’s children or senior management to grow into their new roles, or for the optimal transfer of ownership to non-family members.

Estate planning
A business owner should make sure their estate and legacy goals are documented and include plans for business assets – with at minimum an updated Will. A valid Will, and, in provinces that permit it, a secondary Will for business assets to minimize future probate costs, is beneficial. At the time that the business owner’s Wills are being updated, powers of attorney should also be refreshed – providing authority for trusted individuals to take care of the business should the owner be incapacitated.

Having a wealth plan in place helps give business owners added confidence about their progress toward achieving their personal, business and family goals. We believe that professional advice and planning go hand in hand. By working with investment and wealth professionals who understand the importance of addressing the personal needs of business owners, a business owner can get advice that is tailored to their individual and business needs, and can plan for a stronger financial future.