Still recovering from pandemic-induced challenges, US small businesses are failing to plan for the long term, according to research from Massachusetts Mutual Life Insurance Company’s Business Owner Perspectives Study.
Dealing with Owner Inertia
The survey noted that about 1 in 2 (46%) small-business owners plan to retire within the next decade; however, only 1 in 3 (35%) have begun creating a succession plan. And about 1 in 2 (49%) said that they want to keep the business in their families; yet, far fewer of them (33%) have identified successors.
So what is causing this hesitation among business owners when it comes to planning for their future? “Business owner inertia around succession planning really stems from three things,” said Brian Trzcinski, a certified exit planning advisor and director of business market development with MassMutual.
“These are a lack of time, resources and perceived need.
It’s always something they think they can do at a later time or even wait until they are actually ready to exit,” he said. “The problem is, exits can happen either by design or by default; so, business owners need to be prepared to leave their businesses at any time because it can happen at any time.”
To get business owners to take action, financial advisors should help them understand the importance of having a plan in place should something unexpected were to force them out of the business, Trzcinski said. “A documented, properly funded and communicated succession plan is the best way to ensure the continuity of the business, no matter the circumstances of the owner’s exit,” he said.
Also, advisors should have meaningful conversations with business owners about the impact their chosen exit strategy can have on their future retirement income because most business owners want to maintain their current standard of living, even after they exit.
Shoring up Retirement Savings
Another interesting finding of the survey is that when it comes to retirement savings, only 46% of owners have invested in a qualified retirement savings plan, and 54% feel they should be saving even more.
As they strive to address this issue, the first thing business owners need to do is to get a true understanding of the amount the business will realistically contribute to the retirement income strategy, added Trzcinski. “That involves getting an accurate value of the business and then determining how much money the owner needs to maintain their current standard of living in retirement,” he said.
There typically is a gap between these two numbers, called “the income replacement gap.” Business owners need to grow assets outside the business to reduce/eliminate the gap, Trzcinski added.
Qualified plans are one strategy owners can leverage, as are nonqualified deferred compensation plans and other life insurance-based employee-benefit strategies.
“What owners need to ask themselves is: How much do I need to save annually to achieve my goals? What kinds of tax advantages am I looking for? And do I want to offer these plans to all of my employees or just a select few?” Trzcinski said. “These questions will help them determine the strategies that are best suited to their needs.”
Attracting and Retaining Key Employees
The survey also identified an issue many companies are currently facing: how to attract and retain their key employees.
Among the survey’s findings on this critical need:
*43 percent of small-business owners are facing workforce and staffing issues, specifically in maintaining employee productivity and morale, and hiring in a competitive market.
*39 percent of small-business owners are facing supply chain issues, such as rising costs and increased shipping time.
*To compete in the labor market, small-business owners have offered increased wages (42%), more flexibility (41%), and bonuses (36%) in order to hire and retain employees.
To further tackle these employee-retention challenges, small- business owners really need to seek guidance from external advisors regarding the different ways they can attract and retain top talent, Trzcinski said. “Too many business owners are building these plans themselves and not updating them with the changing needs of the workforce. Not all employee benefits are created equal and certain ones are more valued by employees than others,” he said.
More Than Competitive Pay Needed
Competitive pay is only the beginning, Trzcinski added. “Retirement savings plans, preventative health and wellness incentives, and financial education programs are popular elements of today’s compensation packages,” he said.
In addition, Trzcinski said, “bonuses used to pay life insurance premiums, employer-paid disability income insurance, or non-qualified deferred compensation programs can help keep your most valuable employees in place.”
MassMutual’s 2022 Business Owner Perspectives Study was conducted by LRW via a 20-minute online survey of 800 U.S. business owners in December of 2021. LRW selected U.S. business owners and partners, excluding sole proprietorships where owner is sole employee, from businesses with fewer than 500 employees and no more than 20% with over 100 employees.
This is the fourth time that MassMutual has conducted this survey (see results from 2018, 2015 and 2011). View the full 2022 Business Owner Perspectives Study and visit MassMutual’s website for additional financial resources and guidance for business owners.
Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com.
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