3 reasons why a business savvy financial planner can be a difference maker

Financial planners who deal almost exclusively with business owners are a rare breed. Here's why they're useful.

3 Reasons why a business savvy financial planner can be a difference maker

Almost everyone can benefit from a top shelf financial planner. The vast majority of us will experience many financial ups and downs in life, and it's always beneficial to have a steady hand helping us avoid common pitfalls and ensuring that we're balancing everyday life and our long-term needs. For business owners, however, planning needs are typically even more intense. And those ups and downs? Let's just say they turn into Mount Everest and Marianas trench style events. When you're out shopping for a planner, it pays to ask questions about a planners experience level with self-employed folks. Complexities vary across the landscape of business owners. Some clients may own a few rental homes and technically qualify as business-owning entrepreneurs. We've known many clients that expand a few holdings into an outright real estate empire - so complexity can scale quickly. On the "op co" or operating company side, again a huge range of diversity applies. Small hobby operations or part time service based businesses can start out small and rapidly evolve to acquire all of a business owners focus - and substantial personal investment along the way. This is where the planning needs become central.

A business owner is always faced with a juggling act. Should I invest this spare capital in the business, or save something in a tax sheltered account? Financial planners, trained in the traditionalist merits of diversification and saving for a rainy day will often encourage this. And, to be fair it's not bad advice. However, it's often generic advice, and doesn't take into account the specific financial position of the business. Is this business profitable but just facing a short-term cash flow shortage? Is the business growing, with operating cash flows insufficient to cover investment needs? Or, is the business in a weak position, with the business owner depleting limited reserves on a hope and prayer. The answers to these questions are complex, and the best answers on what makes the most sense will often require high level financial/business analysis skills, combined with robust financial planning knowledge. Good financial planners with strong business knowledge can play an indispensable role - working with accountants, legal advisors to help clients make savvy decisions, balancing needs across business and personal.

Here, we list 3 reasons why a business savvy financial planner can be a difference maker.

Rapidly depreciating assets have their perks

They can create future cash flow plans that blend personal and business general ledgers

Many high quality financial planners will insist on a robust software system to help them forecast reasonably plausible after-tax, after-inflation cash flows across future years. For business owners dealing with operating companies, a whole variety of inputs are subject to business performance. Salary? It depends on whether the business can continue to pay owners what they want. Dividends are often even more volatile - rising in good years and dipping in bad years. What about a sale or exit? The timing of these events is uncertain. Many owners must accept wild fluctuations between fair estimates of value and the prices that they may be offered by participants in the private market. While publicly traded securities have the benefit of transparency, liquidity and a wide consensus regarding fair market value, private unlisted firms have no such benefits. Small private companies typically offer investors relatively low quality financial statements (unaudited, NTR, etc) and intrinsic drivers of value, as well as volatility and growth can make valuation a difficult, uncertain exercise. All of these factors increase risk premia and drive down present values. For financial planners, the whole exercise can be filled with so much uncertainty that they might value a company based on book value - or make a very conservative assumption of value - in order to justify a plausible net worth amount on the clients financial plan. The last thing they will want to do is entertain a business owners unrealistic valuation aspirations, potentially setting the stage for a disappointing retirement if the business fails down the road. These are difficult waters to navigate, and objective, high quality analysis, leveraging accountants and lawyers can be an invaluable complement to a clients business and personal strategy.

Conclusion: Integrate personal and business general ledgers into conservative forecasts. Long-term forecasts are highly uncertain. A 1-3 year forecast is reasonable with conservative assumption for the long-term. Traditional advice about balancing personal and business wealth is still sound. Business owners with healthy investment portfolios on the personal side will not only have an easier time raising cheap debt capital from banks, but they have a critical backup plan if their business interests go south. High profit years are critical times to purify the balance sheet and take a dividend. If the business is having a banner year, perhaps that's a good year to pay the owner a high salary income to reduce net income. That high taxable personal salary can then be offset (in Canada) with a high RRSP contribution (if there's banked room). In this way, prior contribution room and tax benefits for the corporation are both addressed.

They can help make sure a succession & estate plan are in place

It's important to blend estate plans and succession plans. Just as we never know when we will pass, we also never know when someone will stroll by with an offer to buy our business at a price too generous to ignore. That price will likely involve an expectation to see high quality financials, reasonable growth projections and evidence that the business is a "turnkey" operation that can be run by someone else. These exciting scenarios can fall apart if the books are poor quality, the business owner "is" the business, or sales are in a downward trend. Businesses that have low credibility expenses with missing receipts, low-credibility sales with weak evidence of fulfillment, and wild swings in financial performance can expect to be passed over for more disciplined operations. Unexpected negative events can and do happen. The disability or death of a business owner can cause a catastrophe if adequate key person insurance, buy-sell agreements and valuation clauses along with strong overall egal/tax/financial planning haven't been sought ahead of time.

“The owner of the company recently passed away, and we are heartbroken and completely freaked out. No one has been named next in command, and his family wants nothing to do with the business” (K. Miller, Washington Post, Dec 3, 2020).

They can make sure inter -corporate or personal borrowing is structured properly

Keeping poor records and haphazardly lending and borrowing money from your corporation, especially over multi-year periods, is a wonderful way to get into tax trouble with the IRS or Canada Revenue Agency. Tax rules can be complex, and it is often best to carefully follow recommended best practices in these areas. If you are borrowing money from your company, and it's less than a year, a shareholder loan account that is carefully supervised and zeroed out before year end can be a low risk tactic. It is often important to know the difference between arms length and non-arms length transactions and to be wary of things that might technically be innocent - can look dodgy when reviewed by a tax authority. In Canada, funds borrowed from a company should be accompanied with a formal loan agreement, a prescribed interest rate that meets federal guidelines and a timeline to return the funds. If these transactions are not structured properly, an audit may result in these withdrawals being considered "income" - with interest and penalties resulting. When in doubt, consult your legal or tax advisor. In our experience, a modest amount of money spent on due diligence ahead of time, along with records of advice received and guidance sought, is always the best approach.