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Managing Your Personal Wealth

Jake was visibly upset when he came to see us. He had been planning to retire in 3 years by age 55, based on the combined value of his personal investments and his company. This was now on hold for an indefinite period of time. Like many, he had suffered a significant hit in the 2008 through 2009 stock market declines. He wanted to visit about the benefits of a comprehensive wealth plan - something he hadn't taken the time to explore in the past.

The Next Step Program identifies the top 12 principal reasons which have caused business owner transitions and exits to be unsuccessful. Each of these reasons impacts the company's ongoing annual profitability as well as an owner's transition and future exit results. This article addresses the 6th of these 12 reasons:

  • Reason #6. Mismanagement of Personal Wealth. You have failed to properly manage your personal (non-company) wealth, resulting in an indefinite and extended need to draw on company resources and a disruption to your transition timing and to your successor's expectations.

In order to grow your investments, it's critical that you take the following action:

  • Develop a Comprehensive Wealth Plan

A business owner's personal wealth planning is critical to successful transition and exit planning. The failure to address your personal wealth planning can delay or diminish the odds of meeting your key business transition and exit objectives.

A properly prepared Comprehensive Wealth Plan will review and evaluate your personal investment growth plan. This involves a review of your present personal investment plan and will address step-by-step guidance for achieving the personal investment goals you have set.

Before developing any type of Comprehensive Wealth Plan, it is critical to first determine your principal investment goals. Obviously, the underlying goal of any investment or wealth management program is to make money, rather than to lose money.

However, when implementing an investment or wealth growth plan, it is key that both you and your financial advisor have a deeper understanding of your particular situation and objectives.

This is particularly true when you are the owner of a business. Often, for business owners, a very high percentage of your net wealth is still invested in your business. Often, the principal wealth invested outside the business may be in the qualified retirement plan established through the company. In addition, you may have some separate savings and investment accounts. Generally speaking, the strategy and asset allocation for these accounts will largely depend on how near in time you are to completing your transition from your business.

There are a variety of ways in which Comprehensive Wealth Planning is approached today by various financial advisors. While we have included below some of the more common areas which are covered by financial advisors during the course of developing a Comprehensive Wealth Plan, this list of items we have included should not be considered as exclusive or as necessarily required by every financial advisor.

  • Cash Flow Liquidity. One of the elements of many Comprehensive Wealth Plans is a cash flow analysis, which will take into account your current and expected income sources and expenses. This begins with a discussion and understanding of your current and future cash flow sources and cash need objectives. This includes not simply a review of needs, but also a review of your particular desires. This may include early retirement, funding for your family, the purchase of a second residence, and charitable/philanthropic objectives.
  • Wealth Growth and Enhancement. The key, of course, to growing and enhancing your investment wealth is to have the right mix of assets as a part of your investment portfolio. This includes not simply your particular choices among various stocks, bonds, and other financial investment alternatives, but also the proper or optimal asset allocation among various investment classes. A financial advisor will typically review your asset allocation, and will recommend revisions based on your particular liquidity needs, your risk tolerance, and your time horizon. This review will identify your overall investment portfolio objectives to identify your needs with regard to income, growth, and balanced investment alternatives.
  • Retirement Planning. Retirement planning entails a thorough review of your current and projected resources, your expected timeline for retirement, and your expected plans upon retirement. In order to help incent savings for retirement, the federal government has instituted a number of qualified, tax deferred retirement planning vehicles in the form of various retirement plans. These include, for example, 401k Plans, Profit-Sharing Plans, ESOPs, and IRAs. Each financial advisor firm with which you work will have detailed information about the suitability and pros/cons of each of these tools.
  • Wealth Plan Insurance. Your Comprehensive Wealth Plan will also review and recommend a program of life, disability, and casualty to assess and address your personal contingency risks for unexpected death, disability, and casualty.
  • The Link Between Business Debt and Personal Debt. Any plan for debt payoff pursuant to a contingency plan should be consistent with your overall Wealth Plan. Your company's debt level can be of particular concern because your unplanned absence due to death or disability may result in a call for repayment or the inability to refinance the debt in the future, particularly if the bank has looked to your presence or financial backing in its lending program to your company.
  • Legacy Planning. While you have worked hard to create and to save wealth, both in your business and in your personal investments, this wealth can often be dissipated or misused by a second or third generation. While we are all familiar with many of the "rags to riches" scenarios which exist throughout the country, there are just as many "riches to rags" scenarios in which the second or third generation has (through mismanagement, lack of drive, or lack of appreciation for what they have received) promptly proceeded to lose or dissipate much of what the first generation has worked hard to create and save. As you consider your Comprehensive Wealth Plan, in addition to addressing the "financial wealth" (i.e. the hard, investment assets), you should also consider the extent to which you need to develop your family's "human wealth." This includes your relationships with your family members as well as the degree to which you have instilled in them the family, personal, financial, and business acumen and responsibility which you would like them to have in order to carry on the legacy which you have created.

A Comprehensive Wealth Plan, regardless of a consistent and persistent solid investment return, is not completely successful if you have not taken care of your most valuable assets, which are you and your family. Every business owner should take a few minutes to make an honest assessment of your and your family's and wellbeing with the intention of taking those actions that are necessary to help provide reasonable assurance that you and your family can live long lives and enjoy the "fruits of your labor."

The Next Step Transition Growth and Exit Planning program has been specifically designed to address and overcome each of the 12 principal reasons for failure. This program consists of 12 critical building blocks. We are using this program to help business owners design and implement their Transition Growth Plans for accomplishing their transitions and exits successfully.

Nicholas K. Niemann, Esq., is a transition and exit planning advisor and a partner in the law firm of McGrath North. The firm's website is www.McGrathNorth.com.

Andrew D. Horowitz, CPhD, is a wealth advisor and president of The Estate Management Group. The firm's website is www.EMGPlanning.com.

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