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How Financial Advisors Can Help Small Business

Running a small business can be a demanding endeavor, with business owners often stretched thin across various responsibilities, including legal, human resources, and daily operations. One crucial aspect that may not receive the necessary attention is the financial health of the business. This is where financial advisors can step in and play a pivotal role in helping small businesses succeed.
Below, we share several ways financial advisors can assist small business owners in maximizing value and time: insurance planning, asset management, exit strategy, employee benefits, and wealth management for owners.

Key Takeaways

  • Small business owners can build relationships with financial advisors to help them with critical tasks beyond just portfolio management.
  • Financial advisors can help navigate the types and levels of insurance each specific small business should have.
  • Financial advisors can also help analyze, track, and make recommendations regarding the performance of the business.
  • When it comes time to leave the company for a different opportunity or retirement, a financial advisor can assist with the transition.
  • A financial advisor can also help oversee, protect, and grow lump-sum distributions from the exit of an ownership position through traditional financial management.

The Relationship Between Financial Advisors and Small Business Owners

Some of us may think that financial advisors are only useful for managing investment portfolios or building personal or family financial plans. But business owners can also benefit from a skilled and trusted financial advisor. Indeed, a strong, collaborative relationship between financial advisors and small business owners can be extremely helpful for the ongoing success of a company. In many cases, a trusted financial advisor will work closely with entrepreneurs to understand their businesses' unique challenges and opportunities and offer customized solutions to address them.
For instance, insurance planning can provide not only peace of mind but also essential protection for the business and its assets in the case of an untimely death of an owner or key employee. Or, they can guide small business owners through the complex process of developing an exit strategy, ensuring a smooth transition and continuation of the business when it's time to move on or retire. This may involve preparing the business for sale, transferring ownership to family members, or exploring merger and acquisition opportunities.
In addition, financial advisors can help small business owners design and implement employee benefit programs, such as retirement savings plans, health insurance, and other perks. These offerings not only attract and retain top talent but also contribute to the overall financial stability of the employees and the company.
By leveraging their expertise and knowledge, financial advisors can help small business owners make informed decisions that promote long-term financial stability and growth. This support not only benefits the small business owner's personal financial wellbeing but also contributes to the overall success and sustainability of the business, its employees, and other stakeholders. Furthermore, the relationship between financial advisors and small business owners can evolve and change over time as the business grows and matures, allowing for a more dynamic and responsive partnership.

Assisting with Insurance Planning

There's a variety of policy options for small business owners looking for protection and risk mitigation. General liability insurance coverage usually includes injury, customer property damage, or libel and slander lawsuits. If your clients are looking to sign a commercial lease, they may be required to have general liability coverage.

One of the most traumatic events for a business is the death of the owner, partner, or other key employees. In these instances, death or long-term disability can cause a variety of problems including business closure, temporary shutdown of operations, mandatory buyout of a part-owner’s heirs, or a sizeable tax assessment if the business is sold.

With the help of a financial advisor, these risks can be mitigated through a variety of specific policies including life, disability, and key person insurance. Many partnership agreements also call for the implementation of a buy-sell agreement that mandates life insurance policies purchased on all partners to buy out their ownership stake in the event of early death.

Due to the nature of certain businesses, financial advisors can help assess whether error and omissions (E&O) insurance is worth it for a small business. These policies protect against negligence lawsuits or damages caused by work oversights. You can also help your client determine whether they need cyber liability coverage.

Managing the Financial Assets of the Business

As sales and profits grow, small business owners who don’t have the time for investment research often allow capital to build up in checking and low-returning accounts, earning little on their accumulated cash. Financial advisors can assist time-constrained small business owners in the efficient allocation of financial assets.

Part of the difficulty in managing the earnings of a small business is determining the future cashflow needs of the business. A financial advisor should work with the client to understand their company, what future aspirations are being planned, and what resources will be needed for company growth. While investing unused funds makes sense, locking money into illiquid vehicles or incurring capital losses puts future company development at risk.

Financial advisors can also help manage the cyclicality of operations to ensure the client will have sufficient cashflow year-round. For example, imagine a small wedding planning business with busier operations in summer months than the winter months. A financial advisor can help to ensure that the company has enough money on hand to survive the slower season and prosper during busier times.

Planning the Exit

All small business owners will eventually exit their businesses. Some eventually sell, while other transfer ownership to family members. Some business also end for financial reasons or due to the passing of the owner.

Selling or transferring ownership can prove to be a complex process requiring knowledge and experience with a wide range of factors including valuation of the business, effects of the sale on employee benefits, and taxes. Prior to and during a sale or transfer, a financial advisor can distill advice from experts in each facet of the transaction to develop a strategy that yields positive outcomes across all aspects of the owner’s exit.

Some businesses simply do not make enough money. If an owner is too emotionally tied-up with their small business, it is up to the owner's financial advisor to map out the financial situation and deliver hard-to-hear information. A company may have enough funds today, but financial advisors more in tune with the cashflow forecast and financial trends of the small company may be able to detect trouble before the owner.

While there are insurance coverage options available to alleviate some financial burden from the passing of an owner, the transfer of assets at the time of death is an incredibly complex and risky process. Mistreatment of estate assets may result in large tax assessments, and the legal process is often fraught with paperwork, deadlines, and requirements. For grieving family members that may need assistance, financial advisors can aid with this process.

Implementing Company Benefits

Many companies offer their clients 401(k) or similar defined-contribution retirement plans for their employees to participate in. Establishing and installing a plan in a company often comes with many reporting and management requirements, though your client can outsource much of the administrative burden. Financial advisors can oversee the retirement plan, provide consultation to all employees of the small company, and receive management fees.

Establishing employee retirement plans, as well as other benefits, is a great way for businesses to minimize turnover and retain valuable employees. Some small businesses may offer subsidized insurance coverage to its employees or simply award specific levels of disability insurance to all staff. A financial advisor can report on the cost of such benefits to the company as the small business owner weights the benefit of providing these perks.

Financial advisors can also guide small business owners who are considering additional employee benefits like flexible work arrangements, employee stock ownership plans (ESOPs), tuition reimbursement, and health & wellness programs. By offering tailored advice regarding the costs, tax implications, and potential return on investment, financial advisors help small business owners determine the most suitable benefits package for their company. This support allows entrepreneurs to create a more competitive and supportive work environment that not only attracts top talent but also fosters employee loyalty and engagement.

Managing Post-Business Portfolio

After selling or transferring a small business, an ex-owner may have significant financial assets. At this point in the financial relationship, an advisor is likely to assume the more traditional role of managing investments, developing a plan for the ex-owner’s estate, and replacing income that was generated by the business.

Some small business owners leave their company because it's time to retire. In this case, a financial advisor is tasked with ensuring the stability and safeguarding of portfolio assets. This may also include succession planning, wealth transfer preparation, and strategizing about pulling Social Security.
If a small business owner leaves but is not yet ready to retire, they may require much more assistance from an advisor. A good financial advisor will begin by understanding what financial goals the client has and how can the resources obtained from the sale of the small business be used to achieve those goals. Sale proceeds from the disposition of their small business may be transferred into tax-advantage vehicles like IRAs or leveraged into riskier, growth-generating holdings.

How Can Financial Advisors Help Small Businesses?

Financial advisors can play an important part in helping small businesses form, grow, and close. Advisors are a great resource when deciding what level of insurance coverage you need, what benefits to extend to your clients, and what your future cash flow looks like. A financial advisor can also help with the transition away from your small business when you decide its time to sell or leave your company.

Should My Small Business Offer Retirement Benefits?

Whether or not your small business offers your employees retirement benefits depends on several factors. First, you will likely have to pay to have the plan implemented and monitored. Second, you must decide whether you want to match contributions and whether your company can afford to do so. Third, you must weigh the cost of managing retirement benefits with the level of interest within your employees.

What Insurance Coverage Does My Small Business Need?

Each small business is different, and the industry you operating within may call for higher or lower levels of insurance. In addition, each state has its own insurance requirements. If you're not sure what level and what type of coverage you need, a financial advisor can help determine what is best for your situation.

The Bottom Line

There's a lot that goes into starting and managing a small business. To alleviate some of the burden, small business owners can turn to their financial advisors to help manage business assets, implement insurance or company-wide benefits, and plan for life after the owner leaves the company. A financial advisor can make sure that as a business owner you don't have to go it alone - they can help you manage these aspects of the business so you can focus on the day-to-day operations and other, more pressing matters.
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