The 6 Ls of Small Business Planning


Small business owners shed their blood, sweat and tears in their businesses, so it’s no wonder that such dedication can cause little tunnel vision. By being so focused on day-to-day operations, owners often don’t spend the proper time on personal planning. This creates a reality where these business owners underinsure and underinvest outside of their own business.

Essentially, a successful business becomes a security blanket because owners do not sufficiently plan for events that could change the course of their financial well-being. It is the responsibility of financial advisers to help them cope with critical events that will disrupt everything personal and business. We run these fire drills (aka the six “L’s”) for all of our business owner clients each year asking them, “What is the plan for dealing with the following emergencies: cash flow, long term disability, death, care, longevity and inheritance / legal? “

  • Liquidity: If a business owner has to write a large check for something unexpected, like office repairs after a devastating storm, where will that $ 10,000 or $ 20,000 come from? Companies generally do not have substantial liquidity, as a large part of their capital is tied up in operations. Therefore, lines of credit tend to be the most common solution for homeowners faced with this situation. When performing this exercise, make sure you have access to short-term cash if needed.
  • Long-term disability: Owners are often disproportionate contributors to the success of their small businesses. If they lose the ability to work, the entire organization can suffer, from sales to distribution, operations and customer relationships. What is the plan to protect against such a scenario? The first step should be to identify who can take a leadership role for a short period. But if the disability is long-term, what impact can it have on the value of the business and the succession plan? Solutions can include business overhead insurance or income replacement policies. Stipulations can also be implemented to allow key employees to buy out the owner of the business.
  • The loss of life: What if an owner, business partner, full employee or investor suddenly dies? Life insurance finance buy / sell plans and key person coverage can be an effective tool in these circumstances. However, we find that company ratings are often much higher than what people insure them for. We have also seen multi-owner businesses that do not adequately protect against loss of life because one of the owners is a smoker or in poor health. Other business partners are wary of the cost of insuring this person, so they buy either insufficient coverage or no coverage at all. The biggest concern business owners ignore: becoming coerced partners with the spouse of your deceased business partner.
  • Long term care: Many baby boomers with large business fortunes are starting to wonder what will happen if they need significant medical attention. It’s a legitimate concern, but the aging parents of business owners are an additional consideration. If an owner takes time away from their business to help care for a sick mother or father, the potential disruption to operations and income could be significant. Consider where the capital will come from to offset the cost of long-term care for family members – we don’t want a forced liquidation of company assets.
  • Longevity: What does it mean for a business if the owner has an unusually long lifespan? Has this person considered how their role will evolve, as well as who will succeed them during phases of potentially diminishing interest and capacity? Does the owner expect to receive income for life? If they live to 100 years, it could be a huge expense for the business and a significant burden on the succession team. If the owner lives 30 to 40 years into retirement, can he assume that the business will remain viable for decades? Would annuities or pensions be a wise option to diversify their retirement income? These are all important long term cash flow questions to consider.
  • Legacy / legal: What does the business owner see as a legacy for the coming year, 10 years or 100 years? Is it important to an owner that their business lasts another century? This could be the case if they were chairing a third generation family business. Various types of trusts, gifts, and legal structures can be used to ensure that the business will not be tax decimated when ownership passes to a son or daughter. This type of planning requires estate and tax professionals to ensure that local laws and documentation are aligned.

The main takeaway for advisors is that serving clients’ best interests can sometimes mean asking uncomfortable questions. An annual review should go far beyond performance, allocation and fees. Highlight potentially disruptive scenarios like those described above and create plans to deal with them. With each review, review these plans to determine if they can still be effective responses to the six “L” financial fire drills.


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