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6 Planning Ideas for Advising Entrepreneurs

Advising entrepreneursIf you work with entrepreneurs or small business owners, you likely have an appreciation of their vision, determination and work ethic.  You may also have run into some common hurdles that can derail their finances.  By focusing on the following planning considerations, CPAs and advisers serving entrepreneurs can keep their clients’ business and personal finances on track.

Choose an appropriate business form

Helping entrepreneurs evaluate key tax and nontax factors when selecting a business entity is not only important to the business’ financial success, but also the owner’s.

Should they operate as an S or C corporation, partnership, limited liability company or sole proprietorship? What are the classes of ownership, special allocations, basis, liability, elections and distributions for each structure and the impact of these factors on the owner? Navigating these complex decisions is crucial to getting their business off on the right foot. If you are an AICPA Personal Financial Planning Section member or CPA/PFS credential holder, see Chapter 18 of The Adviser’s Guide to Financial and Estate Planning for a comprehensive overview of entity selection.

Define an exit strategy from the start

If your entrepreneurial client hopes to run their business for an extended period of time, they should consider the current and future market for their industry, how to maximize the value of the business for its eventual sale, a time frame to exit and preparations for due diligence. When an entrepreneur starts with the end in mind, they can make critical personal and business finance decisions along the way.  They are also better equipped to avoid unfortunate scenarios like forced liquidation or an undervalued sale.

Cash (flow) is king

Without the promise of a steady paycheck, entrepreneurs often find their financial net worth tied up in the company and live in fear of bankruptcy.  

When advising entrepreneurs in the start-up phase, encourage clients to shore up personal assets prior to starting their venture.  Relying on alternative sources of income to cover personal expenditures in the early years (e.g. spousal income or steady cash flow from a side venture) helps entrepreneurs successfully manage cash flow challenges that inevitably arise.

Additionally, CPAs and advisers can help make sense of financing options – weighing the pros and cons with clients of private equity, venture capital, crowd funding, angel investors, accelerator programs and debt.

Focus on profit by managing expenses

Helping your entrepreneurial clients manage expenses can provide them continuity in cash flow, as well as make certain that the owner gets paid. In the focus on the business, sometimes the owner’s personal interest is lost in the shuffle. Ironically, this interest was likely one of the primary drivers for creating the business in the first place.

In his book, Profit First, Mike Michalowicz turns the classic accounting equation (income - expenses = profit) on its head and suggests that entrepreneurs focus on profit first by paying themselves out of income and then using what’s left over to determine what expenses are necessary in order to balance the equation (income – profit = expenses).

 Risk and retirement should not be ignored  

Entrepreneurs often have much of their financial net worth tied up in their company, making it critical to save for emergencies, retain adequate insurance for unforeseen disability or sudden death and set aside money for longer-term goals like retirement.

As entrepreneurs evaluate expenses, the adviser should discuss the importance of disability, life, overhead and key-man insurance policies (in the case of partnerships). Not only is adequate insurance coverage essential to replace income and protect their family, but also to protect business continuity and prevent layoffs or bankruptcy.

Furthermore, the CPA and adviser can help with the selection of an appropriate retirement plan depending on the company size and lifecycle (e.g. SIMPLE or SEP IRA, traditional or Roth 401(k) plan, traditional or Roth IRAs).

Turn to AICPA for support

If you provide advice to entrepreneurial clients, the AICPA Personal Financial Planning (PFP) Section can help. As the premier provider of information, tools and guidance for practitioners who advise individuals and small business owners, the PFP Section can equip you with in-depth resources to help you navigate estate, tax, retirement, risk management and investment decisions for your clients. Be sure to check out the 2017 edition of The Adviser’s Guide to Financial and Estate Planninga comprehensive, 1000 page, 4-volume downloadable publication covering all aspects of financial planning.

Deborah Meyer, CPA/PFS, is a fee-only financial planner and investment advisor who serves clients nationally and is based in greater St. Louis, Missouri.  As CEO and founder of the financial planning firm WorthyNest, Deborah empowers families to build and sustain long-term wealth.  She also serves as CEO of SV CPA Services, offering clients traditional accounting, business consulting and tax compliance services.

Advising entrepreneurs courtesy of Shutterstock.

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