When It Comes to Risk, Be Realistic
The unique planning needs of the small-business owner are both challenging and attractive to professional wealth managers. As a group, business owners possess both uncommon dynamism and an almost preternatural optimism about the future.
But small-business owners, high on enthusiasm for their work, can be frustrating when it comes to counsel about the many risks specific to their wealth. Investment advisers find that an alarmingly high number of genuine risks are prone to being ignored or underestimated, to the detriment of appropriate long-term planning. Here are a few of the issues business owners face:
For example, because term life insurance can now be purchased at extremely low prices over the Internet, it is no longer difficult to persuade small-business owners to cover the future income-replacement needs of a spouse and children. But whereas the statistical likelihood of a greatly premature death is quite small, and in any case is easily and inexpensively insurable, few small-business owners are willing to contemplate the costs of disability. Nor do they spend any time assessing the potential devastating effects on the success of their entrepreneurial activity. All this, despite studies that show the likelihood is fairly high of a worker being disabled in a manner that disrupts business.
Disability insurance, unlike life insurance, is neither easy nor inexpensive to obtain. As a result, many business owners simply assume (or hope) that "it won't happen to me. Small-business owners are encouraged to consider, however, the business implications of strokes, heart attacks, and the kinds of dreaded diseases that are conjured up at the mention of "disability insurance.
Equally important are the consequences of mild and "normal injuries. A wealth manager asked a very successful construction contractor recently, what would happen to his business if he broke his leg, twisted a knee, or did something that would put him in a reasonably large cast for a month or two. "That would very likely bankrupt me, he said. "My guys need me on the job every day. If I couldn't get there, we couldn't work, and if I couldn't bid out new work, I'd lose my crew. My guys are great, but they need to work every day or I'll lose them. In this totally normal, yet unpredictable world, this business owner's family is fine financially if he dies, but a nasty day at the ski slopes could wipe out 20 years of accumulated success.
Quite apart from physical difficulties such as death and disability, small-business owners are also at much greater financial risk in the event that even one or two key employees choose, for whatever reason, to leave the business. Even rational, hierarchical, and bureaucratic entities struggle to replace the institutional knowledge that walks out the door without warning. Such departures can devastate small businesses. Here, too, the small-business owner can be prone to overconfidence, certain that a key player's satisfaction with the workplace will translate into an extended tenure with the firm.
A business owner in Las Vegas recently lost a critically important store manager who had to move (that day!) to take care of a relative displaced by Hurricane Katrina. Educated, talented, motivated, and loyal help is not easily found in Las Vegas' tight job market, and this business owner expects it will take two years before this store, a key part of his overall operation, recovers.
There are many other non-economic factors that can sabotage a small business. It must also be said that many small-business owners are also inclined to have so much confidence in the economic viability of a chosen concern that legitimate global trends regarding competition may be overlooked. This is especially true today among real estate professionals, just as it was among tech professionals five years ago. Pessimists likely have no business embracing entrepreneurial risk, of course, but the awesome changes in the competitive environment in just the past several years ought not be dismissed, either.
Even a few obvious items send shudders through a thoughtful observer. Chinese and Mexican labor is skilled, eager, cheap, and basically limitless; the Internet allows every customer to compare every price for virtually every good and service; and, in addition to hot dogs, Costco now sells huge diamonds, handmade bicycles, private-label wine, cruises, caskets, financial planning, cars, and, as of today, an original Picasso.
Business owners are wise to evaluate why it is that the wisdom behind the maxim "don't put all of your eggs in one basket rightly applies to them as well, regardless of how confident they may feel about future prospects. Perils occur in many different forms, anticipated and unanticipated. The cost of diversifying beyond a single, small, and beloved entrepreneurial entity may be high, but impact of not planning now to protect a business owner's wealth could be much higher.