Wealth management covers the areas of wealth accumulation, wealth preservation and wealth transfer planning. For business owners, wealth management is a long-term strategy for growing, protecting and enhancing one’s assets to benefit both family and business, and an area of wealth governance that cannot be neglected.
Against a backdrop of rising affluence, Singapore’s wealth management scene has become a buoyant part of the economy, and understandably so. Not only is wealth management important, there is also a big market for it here. According to a report from WealthInsight, Singapore had 154,000 high net worth individuals with a collective net worth of more than $806 billion last year. In the same report, it was revealed that one in every 36 living in Singapore is a millionaire.
These figures are telling of the amount of wealth amassed by those living here. But while wealth creation serves the basis for wealth management, emphasis on wealth preservation and wealth transfer planning should not be overlooked, if you do not want your hard work to come to naught. The following are questions every business owner should ask when devising a comprehensive wealth management plan to achieve financial mastery:
1. What is your exit strategy for retirement?
Planning for your exit might seem premature if you are a young business owner, but a little head start towards retirement planning never hurts anyone. Whether you plan for an acquisition, management buyout, liquidation, or family succession, the onus is on you to ensure that you have a well-funded retirement to see you through the next stage of your life.
For most business owners, the business is the largest potential retirement asset. As such, knowledge of your business value, as well as your desired age and lifestyle for retirement allows you to plan for your eventual exit.
A common mistake made by business owners is overvaluing or undervaluing their businesses. Without knowing your business value, it is then impossible to effectively chart your retirement.
If yours is a family-owned business, it is likely that you would pass the rein to the next generation. If so, do you have a formalised succession plan to ease the transition for a family member to take control of the business?
The earlier you prepare for these transitions, the more control you have over the outcome. Yet, only 58% of local family-owned businesses have prepared for succession, according to a report released by The Economist Intelligence Unit (EIU) last year. And owing to factors such as the lack of a proper succession plan, many inter-generational business transfers fail.
This brings us to the next question.
2. How to determine the value of your business?
Your business value is always fluctuating, but that should not hold you back from a formal business valuation. One of the most obvious reasons for doing so is putting your business up for sale. But even if you are not planning to do that yet, going through the process gives you the opportunity to look at your business the way a buyer would, and ways to increase your business value.
Apart from planning for retirement – which should start earlier rather than later – knowing your business value is essential in wealth transfer planning, when you eventually draw up an estate plan.
3. Do you safeguard your personal assets from potential business risks?
Your business is your vehicle for wealth creation. Naturally, it is in your vested interest to identify and manage business risks that could potentially derail what you have painstakingly set up.
While some risks are common to most businesses, others are specific to your industry. Some common business risks include loss of key employees, frauds, workplace injury claims and lawsuits.
When it comes to risk management, asset protection is crucial. It is also a means of wealth preservation. What it does is protect your personal wealth against potential litigations and claims. Typically, asset protection strategies vary to comprise different liability coverages such as protection against third party claims, or workers’ compensation insurances. Another approach would be to set up a trust to insulate your personal assets and business from liabilities.
Obviously, keeping your personal and business risks separate also means keeping these finances apart. A common mistake made by some business owners is becoming the personal guarantees for business loans. However, this could prove to be the worst financial decision ever made.
4. What would happen to your business and family in the event of death or disability?
Contemplating death or possible disability is morbid and best avoided by most business owners who would rather busy themselves with business demands. However, that could mean dire consequences for the business and family members.
Regardless of a business owner’s net worth, estate planning is important as it ensures that family and business matters are deliberated on and ascertained when they are still able to do so. It is a wealth transfer strategy that allows you to effectively and efficiency distribute your assets through tools such as a will, trust, life insurance, power of attorney, buy-sell agreement and succession plan. The benefits of having an estate plan go beyond dollars and cents, as it takes away ambiguity at home and at the office, thereby minimising disputes.
5. How much profits should be reinvested in the business?
As a business owner, you already know that reinvesting is critical for the business’ continuity. However, there is no rocket science answer when determining how much profit should be used to serve this purpose.
Profits reinvested could be channelled towards boosting infrastructure and operations, furthering employees’ skills, or promoting marketing and public relations efforts, just to name a few. If not for reinvesting, it could be to serve other business purposes like ensuring surpluses to see the business through seasonal low periods.
In Singapore, businesses are exempt from capital gains tax, and corporate tax rates are among the lowest worldwide. Making the decision to take out profits is unlikely to be tax-related. Instead, they could be used to fund retirement through life insurances, or invested in stocks, bonds, or properties.
Whether it is paying yourself first, or fuelling your business’ growth. Decisions should be aligned with your personal and business aspirations.
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