Entrepreneurs Shouldn't Be Too Entrepreneurial With Their Own Wealth Planning Entrepreneurs often make detailed plans for building their business but neglect planning their own exit to safeguard the wealth created for their families and future generations.

By Michael Carter

Opinions expressed by Entrepreneur contributors are their own.


Entrepreneurs have a unique mindset and are largely creative and visionary individuals. They are also risk takers, which is usually a key characteristic and gives them the drive and inspiration to found and build businesses. However, this trait is not necessarily the best quality or the ideal approach to managing their wealth or enhancing their investment strategy outside of their own business. In particular, entrepreneurs often make detailed plans for building their business but neglect planning their own exit to safeguard the wealth created for their families and future generations.

Worse, the entrepreneurial mindset that enabled them to take on the risk in the first place should not be used to manage the portfolios they build. The majority of an entrepreneur's wealth is typically in her shares or ownership interests in her business. Nearly every wealth management planning system fails to flag that when they provide a 360-degree of the entrepreneur's personal wealth. Without that knowledge of what the value is of their own business interests, the portfolio recommendations of most wealth advisors may be flawed. For instance, if 60 percent of an entrepreneur's wealth is tied into the shares of her own business, then the remaining 40 percent should be in more conservative portfolio allocations. Without incorporating the personal wealth from the owner's business interests, that portfolio may have been allocated more aggressively.

Related: How Entrepreneurs and Small Business Owners Can Prepare for the Worst

When launching a business, entrepreneurs are supported by investors, teams and their family who all share in their company's vision, but these groups are also the most at risk should that vision be clouded or dimmed by an unforeseen event. The people who are most invested in the business will be most at risk if an entrepreneur fails to plan his investments or for life post any exit from the business.

Many entrepreneurs also have a significant portion of their wealth and assets tied up in their business and they rely on its sale to fund their retirement. According to a recent survey by the Financial Planning Association/CNBC, some 78 percent of business owners plan to fund at least 80 percent of their retirement by exiting and selling their business.

So, it is important both for entrepreneurs' own financial health and to ensure that their families benefit from the wealth created that they establish an effective exit plan to ensure that the wealth generated is protected and passed on. Yet, a recent U.S. Trust survey found that the majority of business owners (63 percent) don't have a formal exit strategy, including plans to sell or transfer ownership and leadership of their companies.

Related: 10 Dumb Money Mistakes People Make in Their 30s

In putting together an effective wealth planning strategy all kinds of issues need to be considered. Probably succession planning is a good starting point. However, the U.S. Trust survey found that nearly two-thirds of business owners do not have a succession plan, meaning "that their main source of income could be in jeopardy."

Other issues to address include putting proper corporate governance in place, as well as considering which type of vehicles, trusts, family companies or off-shore arrangements are best suited to ensure that as much wealth as possible is preserved.

One key element of this financial planning that many entrepreneurs ignore, is considering taking out a life insurance policy. The sudden death of a founder could place the family in dire financial difficulties and could derail the company itself, resulting in redundancies, even bankruptcy. Yet, Deloitte found that only 59 percent of family-owned businesses have a detailed contingency plan in the case of death or disability.

Related: True Financial Literacy Starts With Questioning Traditional Financial Advice

Should an entrepreneur die prematurely, a personal life insurance policy can replace income, allowing the entrepreneur's family to continue to enjoy the lifestyle to which they have become accustomed. Also, with the right insurance, surviving business partners will have enough capital to keep the business going while looking for a replacement for the deceased partner, or to buy out his heirs.

Fundamental to most of the decisions, including choosing the right life insurance, entrepreneurs will make to safeguard their wealth is knowing the value of their business and today platforms and services such as those BizEquity offers make this far easier for business owners to discover.

Having such valuable insight into their financial worth helps entrepreneurs take the correct decisions across a range of financial issues, not only insurance but team compensation and bonus levels, reviewing dividend policy as well as considering how much money overall to take out of the company to invest in other assets to protect the wealth generated. After all there is little point in entrepreneurs striving so hard to create their wealth if they don't take equal care in trying to preserve it for their benefit and that of their families or to have a proper portfolio allocation in the first place. The first step in wealth planning is often to determine the risk appetite and goals of its participants, but for entrepreneurs it should be to first understand what they own and how much it is worth in the first place. Only then can a proper wealth management and succession plan be created.
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Michael Carter

Founder and CEO of BizEquity

Michael M. Carter is the founder and CEO of BizEquity and the inventor of an online valuation service that's helping the small business economy. BizEquity was recently recognized as one of the top 360 companies in the United States by Entrepreneur Media for two years in a row.

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