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When Small Business Owners Make Bad Decisions

January 6, 2017

This time we hear from Steve Martin, director at Chicago-based BKD Wealth Advisors. He tells us how a client once insisted his business would take care of his family if he ever died suddenly — as it turned out, the opposite was true.

Small business owners put great stock in their companies -- often for good reason. They pour their hearts and souls into their businesses and are justifiably proud of what they have created. As financial advisors, it is important we understand the emotions that come with business ownership – and that sometimes those emotions lead to bad decisions.

This lesson hit home for me when a client of mine, who owned a small business, insisted he did not need life insurance. He was certain his business would provide all the financial support his wife and children would need. He said that if he died unexpectedly, his wife could simply sell the business. Now when I say, “insisted,” I really mean that. He did not like to talk about the issue of life insurance at all. Even so, we tried to raise the subject on numerous occasions but to no avail. At some point you hope your message sticks, and so you keep trying. But I guess we ran out of time.

What made this situation worse was the client had never included his wife in any financial planning discussions. I had never even met her. The client gave the impression that his wife did not need to know about any details and that she wasn’t interested in the planning process in the first place.

Unfortunately, the client was wrong on both counts — his business was not valuable enough to cover his family’s needs, and his spouse should have been involved all along. The client died unexpectedly while shoveling snow. And it soon became obvious that his business – which was a service-based business and largely depended on his goodwill and client relationships – was not worth that much when he was out of the picture.

Steve Martin

The sale of the business was a disappointment and left a big financial hole for the wife to fill.

My client’s wife was not left destitute but she could no longer afford their house and her children were still facing college. Making matters worse, she had not been in the workforce for years and had few career options. She was overwhelmed at first but she was strong. And we worked with her to set up a plan that would put her on a secure financial footing. Any plans for an early retirement were dashed, but at least she had control of her financial future.

This situation was a stark reminder for me of the need to strip away emotions when it comes to business ownership and look at the bottom line in a critical fashion.

Since this case took place, I have made it a point to have a direct talk with small business owners about the value of their company, and to have that talk early and often. No more waiting to tackle it later when a client insists on avoiding the topic, because as we learned we may never get another chance.

One thing I do is run a risk analysis that projects the value of the company under certain scenarios. These results are often powerful and can spur important, difficult discussions.

I’ve also found it important to talk about the true, mark-to-market value of the company; don’t let your clients merely hazard a guess about what their business is worth. We work with a lot of business owners and I’ve found they often feel their business is worth more than it is. If you suspect your client may be doing so, you can always suggest they get a third-party appraisal, which we’ve done in the past.

Many small business owners pour most of the money they earn back into their business. Owning a small business is an emotional proposition but emotions can lead to bad decisions – especially when it comes to financial planning. As advisors, our job is to protect clients from the negative consequences of those emotional decisions, even if it means protecting them from themselves.