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As volatility persists, business owners should remember their assets

For business owners and entrepreneurs, the world today feels particularly uncertain.

We’re living in an environment, where volatile, external factors seem out of control. It is natural that business owners would primarily focus their efforts on directing what they know and what they can control — their operating company.

But in a business owner’s efforts to pivot operating business, cut costs, or secure new sources of supply, there is risk they might be overlooking — the safety of their assets and ways to protect them.

So how can business owners review and recalibrate their asset protection plans for their business, their personal wealth, and their family?

1. Protecting assets for the business. One of the very first steps that any business owner can do to protect their business is to analyze their value chains and identify any weak links as soon as practical.

Tight job markets and high input costs may have already put smaller business partners under pressure.

The early identification of such suppliers and a proactive approach, such as adapting intercompany credit policies or invoice payment terms, may prevent financial distress becoming contagious.

Entrepreneurs can also take a fresh look at key person risk and whether their firms are suitably insulated against the loss of a key employee.

Life insurance may be one approach that may warrant exploring for business owners considering how to build financial resilience in case a business partner or a key person were to be unable to work.
If the insured employee were to die, the sum paid out could be used to buy out the former owner’s family (a buy-sell agreement) or provide funds that support business continuity.

Business owners may want to reexamine their cash flow management strategies to ensure they keep a suitable amount of cash on hand to cover unanticipated cost hikes or lost demand.
Lastly, entrepreneurs may want to consider whether their business and its assets are insulated from longer-term sustainability threats.

They might also look at how they are best placed to take advantage of sustainability opportunities. It can be easy to lose sight of multi-year sustainability trends when short-term business conditions are fast changing.

2. Protecting assets for the entrepreneur. Looking to primarily navigate a company through difficult times may mean that business owners overlook the protection of their very own personal financial assets.

Doing so may be a costly mistake that could put long-term financial objectives at risk.

First, entrepreneurs might consider working with a financial planner to disentangle their commercial and personal assets, which are often seen as interchangeable.

Second, entrepreneurs might consider whether their personal wealth is overly exposed to a company, country, or sector that is vulnerable to shocks from today’s geopolitical, economic, and sustainability challenges.
Third, business owners can consider changing the composition of their portfolios to include assets that may be resilient in today’s more volatile markets.

Since the global financial crisis in 2008 and 2009, expansionary central bank policy has tended to buoy growth equities, shares whose worth relies on earnings expected further in the future. However, in today’s higher rate and higher inflation environment, value equities in sectors such as energy may offer better opportunities.
Entrepreneurs may also consider whether they are accounting for pricing power and inflation protection in their personal portfolios with the same rigor as they pursue in their businesses.

3. Protecting assets for the entrepreneur’s family. Unpredictability continues to dominate the front page. But business owners looking to transfer their business and financial assets to their families are at major risk of overlooking the importance of asset protection against “internal” threats — a divorce or family bereavement, for example.

Fears that business assets will not be protected by family members are a common reason for entrepreneurs to hold off transferring their firm to the next generation.

In a 2018 UBS Investor Watch survey, 57% of respondents were highly worried that their heirs would sell their business outside the family, while 55% were anxious their successors would squander the company profits.
To allay concerns and protect family assets, founders can first consider working on a robust yet flexible succession plan covering commercial, personal financial, and family assets.

In some jurisdictions, entrepreneurs may also consider whether the use of legal structures such as holding companies and trusts can help to protect assets from threats such as external creditors, legal disputes within the family, or unstable political regimes.

Last, business owners would do well to avoid intergenerational differences around the importance of sustainability by discussing and devising a sustainability plan across the family’s total wealth.

As with all plans, founders might consider aiming to build flexible plans that evolve with economic, commercial, and personal circumstances.

Bart Gibson is a financial adviser with UBS Wealth Management USA. He can be reached at bart.gibson@ubs.com.