Three Financial Mistakes Business Owners May Be Overlooking

Business ownership involves uncertainty. Over a five- or 10-year period, an owner may encounter an unexpected personal event, business disruption, competitive change or simply a shift in their own priorities.

While those events may be difficult to predict, preparing for uncertainty can create more options when circumstances change.

Three areas in particular—business transferability, personal financial independence and liquidity—can play an important role in an owner’s ability to respond.

Mistake 1: Waiting to Think About Leaving the Business

Many owners postpone thinking about how they will eventually leave their company.

But preparing a business to operate successfully under someone else’s ownership can take time. Waiting until a transition becomes necessary may limit an owner’s choices.

Consider what might happen if a health issue, partner dispute, personal financial need, competitive shift or burnout accelerates your timeline. If the company depends heavily on you, lacks documented processes or does not have leadership depth, a potential buyer may have greater leverage during negotiations.

Two questions can provide a useful starting point:

• What parts of the business depend entirely on you today?
• If you were buying your company, what would concern you most during due diligence?

Looking at the company from a potential buyer’s perspective can help identify issues well before a transition occurs.

Mistake 2: Tying Your Financial Future Too Closely to the Business

Business owners frequently have a significant percentage of their wealth concentrated in their companies.

That concentration may help create wealth, but it also means an owner’s financial future can become dependent on a single illiquid asset and an eventual transaction that may be years away.

Building assets outside the company can provide another source of financial independence.

Those assets might include retirement accounts, taxable investment accounts or income-producing real estate. The specific approach will vary, but the broader objective is to gradually build wealth that does not depend exclusively on the future value or sale of the business.

Mistake 3: Underestimating the Need for Liquidity

Long-term wealth is important, but owners may also need flexibility during the years before an eventual exit.

Unexpected events can create immediate demands for capital. Without adequate liquidity, an owner may have fewer choices and could be forced to make decisions under significant time or financial pressure.

Building appropriate sources of liquidity can help buy time. That may allow an owner to respond to a disruption without immediately accepting an unfavorable deal or making a rushed decision.

One way to pressure-test your situation is to ask: If business revenue declined 15%, what would experience the greatest impact—the operating plan or your personal financial plan?

If a business downturn would immediately disrupt your personal finances, it may be worth examining how dependent the two have become.

Creating Options Before You Need Them

Preparing for uncertainty does not mean predicting exactly what will happen.

Instead, it means creating options.

Improving transferability, building wealth outside the business and maintaining appropriate liquidity can give an owner more flexibility when circumstances change. Rather than trying to address everything at once, consider identifying the area where you may be most exposed and begin there.

The goal is not to eliminate uncertainty. It is to put yourself in a stronger position to respond when uncertainty inevitably arrives.

This article is based on an EP Wealth Insights podcast episode about common mistakes business owners may make when building wealth through their businesses, from EP Wealth Advisors.

EP Wealth Insights Podcast Disclosure

The speakers featured in this podcast are employees and/or Investment Adviser Representatives of EP Wealth Advisors. The information discussed is provided for educational and informational purposes only and should not be considered personalized investment, financial, tax, or legal advice.

The views expressed are those of the speakers as of the recording date and are subject to change. Investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.

Before making financial decisions, consult your financial, tax, or legal professional. EP Wealth Advisors is a registered investment adviser. For additional information, including our Form ADV, please visit www.epwealth.com.