Business owners and corporate executives tend to overinvest in their businesses, often ending up with a large portion of their wealth at risk to the fortunes of one company. However difficult, these owners need to diversify their financial assets to better survive periods of stress. The rules of prudent investing tell us that any more than 10 percent of one’s wealth invested in any one company is too much.

“Diversifying is not natural to individuals so closely connected to one business, but it can be a serious risk to their underlying wealth and the financial health of their entire family,” says Nina M. Baranchuk, CFA, Senior Vice President and Chief Investment Officer at First Commonwealth Advisors.

Smart Business spoke with Baranchuk about how to structure portfolios to diversify or offset these concentrated risks.

Why do corporate executives or business owners need to diversify?

Even regular employees get a company paycheck and buy company stock in the 401(k) or the employee stock purchase plan, so the concentration risks for all employees can be severe. Senior executives often accumulate additional large holdings of company stock and options as part of their compensation.

A business owner’s company may also be a disproportionately large part of his or her portfolio as well. An owner bears the risk of the entity and any economic, competitive or regulatory forces that might impact it. Like putting all your chips on red, there are serious consequences to holding so much ‘concentrated’ wealth if things don’t go well. In addition, these holdings can be illiquid — there is no easy exit under times of stress.

How should business owners construct their passive investment portfolios?

In some cases, it may not be possible to diversify much. If an owner can take cash out of the business, he or she should work with a qualified portfolio adviser to ensure that all of his or her passive investments are built to complement or offset the risk. A qualified adviser can craft a portfolio that helps to mitigate your specific concentration risks and manage your overall exposures.

For example, a local Pittsburgh businessperson might be concentrated in a steel or metal fabrication business. So, he or she would share exposure to the fates of this or other industries as well their end markets in the U.S. or overseas. He or she also may have significant risks to things like geography, interest rates, significant product input costs, etc.

You can easily have issues of exposure based on subtle or indirect connections. Some risks to a firm are really in your supply chain or the financial health of a customer’s industry. Maybe you have one or two dominant clients that represent a large percentage of your revenue stream. Geographical risks loom large for some companies as well.

A portfolio built to offset these risks might exclude many other holdings in the industrial arena and overinvest in industries that often do well when industrials/metals do not — think consumer-purchase staples like food and household products or utilities.

What’s another example of offsetting your risk?

One family we worked with had made its wealth in the real estate business — owning everything from apartment complexes to high-rises. Our analytic work found that two good offsets for these holdings were private equity and financial stocks. Thus invested, whatever happens to interest rates, private equity and financials will react in opposition to the direction of real estate, counteracting one of its most impactful environmental factors.

What should executives consider?

While many executives have limited ability to divest their options or stock, they should certainly not invest their 401(k) in the company stock or buy additional shares. Remember that the executives at Enron and WorldCom went down together, along with their options, pensions, paychecks and other compensation.

In this world of heightened competitive and financial risks, no business is immune from potentially negative outcomes. We urge our clients to make sure they have done everything possible to ensure their family’s financial health by planning for worst-case scenarios.

Nina M. Baranchuk, CFA, is a senior vice president and chief investment officer at First Commonwealth Advisors. Reach her at (412) 690-4596 or nbaranchuk@fcbanking.com.

To learn more, call (855) ASK-4-FCA, or visit ask4fca.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh

Whether you are looking to manage your own assets, control how your assets are distributed after your death, plan for incapacity or enable your business to continue uninterrupted should something happen to you, trusts can help you accomplish your estate planning goals. By establishing a trust, you ensure that the assets gathered during your life will not disappear because of the inexperience or inability of beneficiaries. A byproduct of that is the peace of mind that comes from knowing your loved ones will continue to be financially protected.

“One of the benefits of a trust is that it’s established based on the unique needs and objectives of the individual and the individual’s family, and tailored to meet those needs,” says Susan L. Nelson, CTFA, Senior Trust Executive and Senior Vice President at First Commonwealth Advisors.

Smart Business spoke with Nelson about the benefits and management of trusts.

What are the different types of trusts?

There are many types of trusts, the most basic being the revocable and irrevocable.  The type of trust you use will depend on what you are trying to accomplish. A revocable trust, often referred to as a living trust, allows the individual establishing the trust to remain in control of the assets and allows them to change the beneficiary, the trustee, the trust terms and even end the trust. The grantor can use the trust for investment management, bill paying, tax planning and avoidance of probate. It can continue on in the event of incapacity, providing seamless financial management for the grantor, and can continue on after death for the benefit of others. Once the grantor dies, the trust becomes irrevocable.

An irrevocable trust is where the grantor gives complete control to an independent trustee who manages the assets for the grantor and beneficiaries. You cannot easily change or revoke this type of trust. It’s frequently used to minimize potential estate taxes by reducing the taxable estate of the grantor because the assets transferred to this trust, plus any future appreciation, are removed from the grantor’s gross estate. Additionally, property transferred through an irrevocable trust will avoid probate and may be protected from future creditors.

What are the benefits of trusts?

Some benefits are:

  • Continuous financial management in the event of incapacity.

  • Professional investment management.

  • Financial privacy — a trust isn’t public like a will.

  • Probate avoidance with no lapse in asset protection and investments — probate can take a year or more, depending on the complexity.

  • Asset management for inheritances.

  • Creditor protection for heirs. If a beneficiary is going through bankruptcy, money in the trust cannot be touched.

Trusts can provide lifetime financial protection for a surviving spouse or disabled child, an inheritance for children from an earlier marriage, can minimize estate taxes and provide a future legacy for charity. Trusts can be used in order to protect, preserve and transfer wealth for the benefit of individuals, families and organizations. While trusts can be used for myriad circumstances, they are not for everyone. Discuss the advantages and benefits of a trust for your situation with a financial adviser.

How should a trust be managed?

Every trust is based on your needs and objectives. When setting up the trust, determine what you’re trying to accomplish so you and your financial adviser can decide how to reach those objectives. One of the first things looked at are tax implications and how to reduce pain points. Providing for future beneficiaries should also be examined. After the trust is established, you’ll need to meet periodically to discuss the investment portfolio and life changes to be certain the trust still meets your needs.

Why choose a professional trustee?

Institutional fiduciaries are pros at what they do, have professionals on staff with years of experience, and are on the cutting edge of regulatory and tax law changes.  They may be the best option for reliability, experience, responsiveness, neutrality and arms-length objectivity with beneficiaries, objective investment guidance, convenience and consistency over time. An institutional fiduciary doesn’t age or die.

Susan L. Nelson, CTFA, is a senior trust executive and senior vice president at First Commonwealth Advisors. Reach her at (724) 832-6062 or snelson@fcbanking.com.

Follow up: To learn more, call (855) ASK-4-FCA, or visit ask4fca.com.

 

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in National

Estate planning is important for everyone. But in the case of a business owner, not giving serious consideration to what could happen to your business could potentially shut it down entirely, thereby eliminating your family’s income at a time when it is critical.

“It’s important that business owners understand that their plan only works the way it’s set up to work if the circumstances that originally determined the nature of the plan remain the same,” says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors. “So if there are changes in the business structure, goals or family structure, they have to be communicated to the adviser — the accountant, the lawyer, whoever put the plan in place.

“A business owner has to take an active role in making sure the plan still works because only he or she knows the facts as they are today,” she says.

Smart Business spoke with Neals about how a succession plan is thoughtfully created in conjunction with your estate plan and what factors need to be coordinated and reviewed.

Is there a good time to begin planning?

Every individual should have a will, a financial power of attorney and a health care power of attorney/living will. As soon as you have assets or children it’s imperative to plan because otherwise your assets don’t get to where they need to go and your heirs don’t necessarily get cared for the way you’d want. For many, this can occur at an early age.

What’s involved with establishing long-term goals and determining succession risks?

Every person’s long-term goals are different, and they often evolve and change. So continually question how you can accomplish what you need to, such as passing the business on when you retire or providing for your family in the event of your death or incapacitation.

If your long-term goals involve transferring the business to some specific person, constantly re-evaluate whether that person is able and willing. What training and education might be necessary? When do you start transferring the business, and is it in a monetary sense or just voting stock? And if you’re retiring, how and when do you phase yourself out?

What are some strategies for success?

Ensure there’s sufficient insurance on the owner’s life or the necessary liquidity for all situations, and hands-on training and education for whoever is taking over the business. Also, is a spouse with power of attorney making business decisions? Do you want it to work that way? Be aware of the capabilities and willingness of those you name to have this authority.

Estate and succession plans need to work in tandem. For example, company stock may be a very large asset of the estate, but you need to know how that stock will be used to provide the surviving spouse with the necessary cash flow. Does your business successor need a life insurance policy on you to buy the stock so the resulting cash can go into a trust for your spouse?

Regularly work with your advisers to analyze the possible tax consequences of any transfer or proposed transfer. You don’t want to trigger a big gain or loss as a result of a transfer without planning for it.

Finally, a business succession plan needs to take into account the business’s operating structure. Whether it’s a corporation, LLC or partnership, how will the business run during the period when the transfer is taking place? It can be a matter of signatory authority on bank accounts, being able to order inventory, or having someone authorized to sign for accounts payable or receivable to keep daily operations going.

How should you monitor these plans?

Any time there’s a change — in business operations, key employees, family dynamics, goals, etc. — communicate it with the people who helped put the plans in place. Even without changes, it doesn’t hurt to talk to your advisers annually, or at minimum every few years. Even though you may not meet with your accountant or lawyer every year, if you’re working with an investment manager or wealth adviser doing regular performance reviews, a good adviser will ask the questions necessary to help determine whether it’s time to go back and get in front of your other advisers including your accountant and/or lawyer.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or cneals@fcbanking.com.

 

WEBSITE: To learn more about succession planning, visit ask4fca.com.

 

Insights Wealth Management  is brought to you by First Commonwealth Bank

 

Published in National

With lower lease rates and the Marcellus Shale boom, commercial real estate in the tri-state footprint is looking up. Greg Sipos, senior vice president, corporate banking manager, at First Commonwealth Bank, has been encouraged by recent commercial real estate activity in western Pennsylvania, as well as in Akron, Columbus and Youngstown, Ohio.

“When I say those names, you’re not like, ‘Wow, that’s a great place to go,’ but, you know what, it really is these days,” Sipos said. “They’ve had some real estate growth and nice projects in those markets. It’s well ahead of the rest of the country, and I’m encouraged by the amount of activity in the last six months.”

Smart Business spoke with Sipos about the state of the real estate market and how bankers are getting back to the fundamentals of lending.

How does the current commercial real estate market look?

When you look at this market, there was limited asset appreciation over the years, and the borrowers never overleveraged the way that it happened everywhere else. People built equity in their real estate by normal amortization of loans. So if they had a 15-year loan and they paid it back over 15 years, they built equity in their real estate. Western Pennsylvania has always been known for that, as opposed to the rest of U. S., where asset appreciation was due mostly to the perception of overall growth through demographics. Problems occurred because assets were overleveraged in a lot of ways. Conversely, Pittsburgh went from being one of the worst real estate markets in the country to being one of the best in the span of three years because of the steady equity growth.

The mood is very strong in this area with some game changers. The growth in the Marcellus Shale area and the oil and gas industry in western Pennsylvania has brought strength to the market through all aspects, from multifamily to the retail businesses and hospitality industry. Another thing that’s happened in the central business district, as far as Pittsburgh is concerned, is a lot of large firms headquartered in other cities realized that the rent per square foot in Pittsburgh is much more reasonable than the rent per square foot in Manhattan and other comparable markets. Companies are relocating to the central business district or to Pittsburgh in general because of favorable lease rates.

Hospitality is known as a good indicator for the economic health in commercial real estate. What is the outlook in the tri-state area?

Yes, hospitality is an indicator, and it is doing very well now. Western Pennsylvania had a lot of older product, but now a lot of newer product is coming online around Pittsburgh and in some of these smaller towns. Morningstar, a financial-data firm, reports that — at least for the next three or four years — it’s definitely an industry to lend in.

When banks make a loan for hospitality, they look at what the drivers will be — why will people be coming and staying here. A lot of the hospitality that got into trouble was in resort areas because, during recessionary periods, people tend to forgo vacation. The hotels that are successful are the ones that have many drivers. For example, is it a flagged property? It’s much easier in today’s market to get a loan for a Marriott, a Hilton, a Holiday Inn or a Choice product because of the reservation system. One hospitality loan was recently done in Latrobe, Pa., the home of professional golfer Arnold Palmer. There’s a lot of industrial around, it has a resort element because of Idlewild Park and the Laurel Highlands, it has St. Vincent College, hospitals, and it has Mr. Palmer’s name attached to it, which results in reciprocating agreements between Latrobe and Florida. So there are drivers for occupancy. You don’t want to open up a hotel where you have to bet on tourism or one industry.

How have lending practices changed, and how much emphasis is being placed on equity?

The one thing that’s different now — that hasn’t come back the whole way — is the lending rules were generally much less stringent pre-recession. Post-recession, it’s back to the fundamentals. When you want to buy something, you need to have a down payment for it and you need to have cash flow to repay it.

Banks are requiring down payments. As a business owner, when you are thinking about making that expansion or when you’re thinking about buying a new building, you need to make sure you have the right amount of equity to go into the project. The bank is no longer willing to take the equity risk it was taking pre-recession.

Having equity shows you can afford it and shows your commitment to the project. If you are able to buy real estate without putting equity into it, it’s much easier to walk away. Some people might be interpreting that as unfair, but it’s not really unfair, it’s just the way it’s always been done prior to the years leading up to the recession.

It’s important to remember there are differing ways to find equity. These include:

  • Equity through government programs.

  • Investors on the sidelines looking to invest.

  • Personally guaranteeing loans, a practice people were always comfortable with. Borrowers have to be willing to guarantee the indebtedness, maybe by pledging other equities in other properties as collateral.

Greg Sipos is a senior vice president, corporate banking manager, at First Commonwealth Bank. Reach him at (724) 463-2556 or gsipos@fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in National

In recent years, federal estate and gift taxes have been in a continual state of change. As a result, estate planning documents may no longer contain the best options to get individuals, especially those with high net worth, to their goals. And this changing landscape may not be stabilized any time soon; if Congress fails to act before the end of the year, individuals will face significantly lower estate and gift tax exemption amounts and higher tax rates in 2013, says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors.

“Similarly, while the extension of the 15 percent long-term capital gains rate provided ongoing windows of opportunity for those wishing to harvest gains at the lowest long-term capital gains rate in our country’s history, there seems to be no doubt that this historically low rate will be higher in 2013,” says Neals.

Smart Business spoke with Neals about how to react to potential changes in federal estate and gift tax law and capital gains rates.

What does the current landscape mean for wealthy individuals?

For estate planning, as a result of drastic changes in tax rates and exemption amounts, high-net-worth clients should talk to their legal advisers to determine what flexibility is built into the plan for these quickly changing laws. Will their current estate planning documents effectuate their wishes, and will their plans be carried out with similar results regardless of the federal estate and gift tax exemption amounts at the time of death?

The same holds true for the likely changing long-term capital gains rates. Examining assets and current and future personal tax obligations can allow individuals to be strategic and potentially take advantage of the current 15 percent long-term capital gains rate.

Individual should discuss questions and concerns with their investment advisers, accountants and possibly, legal counsel. This ensures that all possible consequences are examined before initiating a sale that would result in a long-term capital gain and avoid surprises that would negatively affect other aspects of the client’s financial picture and/or plan.

What are the federal estate and gift tax exemption amounts and rates, and how could they change?

The federal estate and gift tax exemption amount is $5.12 million per individual, with a tax rate of 35 percent for estates or gifts in excess of that amount. In the absence of new legislation, on Jan. 1, 2013, the rates will return to pre-Bush-era tax cut rates — a $1 million federal and gift tax exemption, with the excess taxed at 55 percent. This could mean the difference between an individual with a $5 million estate paying no federal estate taxes versus paying millions at the time of passing.

Another unknown is what will happen to portability, which makes a deceased spouse’s unused portion of the federal tax exemption available to the surviving spouse. In addition to the higher estate tax exemption, the increased gift tax exemptions amounts have also created a window of opportunity that could allow wealthy individuals to transfer assets to the next generation or second generation heirs without incurring transfer tax, thereby decreasing their own taxable estate.

What could happen to estate and gift taxes?

Determining where these exemptions and rates will head is speculative. While there seems to be consensus on the likelihood of higher long-term capital gains rates, the future of where estate and gift tax exemptions land is still very much unknown. The Obama administration has alluded to supporting a return to 2009 rates, with a $3.5 million federal estate tax exemption and a 45 percent tax rate on the excess, while Republican candidate Mitt Romney’s plan has suggested doing away with the death tax, while keeping the gift tax in place with a $1 million exemption and a 35 percent top gift tax rate. What takes place in the November elections will guide the direction of these tax laws and their upcoming expiration.

What planning techniques can provide flexibility for the current tax landscape and the one that lies ahead?

All individuals should consider a comprehensive review of their estate planning documents. In recent years, it was a common and appropriate planning technique for practitioners to draft estate planning documents that used formula provisions to dispose of assets at the time of a client’s death. With the roller-coaster exemption amounts, this type of formula planning could lead to unintended consequences. For example, in the case of ‘formula documents,’ high exemption amounts could allow all of an individual’s estate to be placed into a trust for their children, leaving the surviving spouse with no assets. Creating documents without formulas allows flexibility as tax laws change.

Have your advisers work together as a team. Your estate planning lawyer, accountant and investment adviser should be working toward your common goals, not giving you advice in a vacuum. This protects you from unknowns and allows you to ask questions and feel comfortable letting the advisers guide you.

How can business owners take advantage of the current rates?

For those with certain closely held assets that are likely to appreciate quickly, including ownership in a private business, certain techniques can allow the transfer of wealth with tax benefits through the use of estate planning tools. However, time constraints may limit options, as valuations and planning can take a considerable amount of time.

For investors who have over concentrated positions or are holding assets with a low cost basis,  selling this year may allow them to take advantage of the 15 percent capital gains rate. In the absence of legislative action, the long-term capital gains tax rate will increase to 20 percent at the beginning of 2013.

If you believe you may benefit from historically low rates and high exemption amounts, contact your advisers to discuss taking advantage of them before the end of the year.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or cneals@fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh

The most damaging thing women business owners can do regarding financial planning is nothing.

“It’s often the last thing that people want to talk about because they are so busy living their lives and running their businesses,” says Nancy Kunz, CFP®, ChFC®, CLU®, Lead Financial Planner at First Commonwealth Financial Advisors, Inc. “Then, by the time they figure it out, they are 65 and staring at retirement. A woman’s instinct often is to help everyone else first, to take care of everyone else, and that is compounded when a woman is also running a business,” says Natalia Paich, CPA, AIFA®, Wealth Relationship Manager at First Commonwealth Financial Advisors, Inc. “But sometimes she needs to put herself first and plan for the future of herself and her business.”

Smart Business spoke with Kunz and Paich about business and financial planning for women business owners.

How do women need to plan differently than men?

There is a high probability of a woman being alone late in life, as men tend to have a shorter life expectancy. It is important to take control of finances now, as doing so will lay the groundwork for making the choices for the future. While the thought of taking ownership of one’s finances may seem daunting, doing so both personally and professionally is imperative.

A common mistake made by women business owners is trying to do it all themselves. Instead, get help from the beginning and find the appropriate professional. Most people don’t truly understand their financial decisions and therefore make uninformed choices or no choices at all. When working with a trusted professional, women should ensure that they are active participants throughout the partnership, from hiring a professional to understanding the decisions and implications of those decisions.

What are some of the biggest financial mistakes female owners make with their business?

We mentioned that the biggest mistake women can make in regard to their finances is doing nothing. The same can be said for women business owners using slightly different words, ‘failure to plan.’  Very few businesses take the time to plan income, expenses, management of receivables and cash flows, money for capital expenditures, etc. Women should take the time to create a financial plan for their business. A big part of creating the financial plan is finding the right professional expertise for legal, tax, financial planning, etc. A business owner’s time should be spent doing what she does best — not on the behind-the-scenes mechanics.

Part of creating the right team of professionals includes where to look for them. Women should look for professionals who are familiar with and have experience with small businesses. Spending the money upfront to pay professionals can save a lot of headaches further down the road.

What do women business owners need to know about saving for retirement, and how can they balance that with other needs?

Women business owners have many options to save for retirement. The best option often depends on whether the business owner has employees, and if so, how many. Some retirement options include SEP IRAs, self-employed 401(k), self-employed Roth 401(k), SIMPLE IRAs and Keogh plans. Each type of plan has different contribution limits, may allow for tax-deductible contributions and withdrawal provisions, and may require taxation of monies at distribution.

It is important to consult with a financial adviser and/or accountant to determine which plan is best suited for the business and business owner. In regard to retirement savings, women business owners should avoid using their own retirement money to fund their business. The long-term effect on retirement savings can be significant. Monies designated for retirement should remain in retirement. Monies designated for business development and growth should be used for the business. A woman doesn’t want to find herself at retirement with only illiquid assets.

What should women know about financial planning when one spouse takes times off from work?

Keep retirement funding going, if possible. If one spouse takes time off to raise the family, increase savings into the spouse’s company-sponsored retirement plan and/or consider establishing a spousal IRA. This may not always be an option, so it is important to confer with a trusted adviser. Expectations for the family’s standard of living are paramount not only to planning but also to adjusting to one income, so those need to be realistic and continually reviewed.

If a woman business owner decides to leave her business, she should keep current with her profession so that when she is ready to re-enter the work force or start a new business, doing so will be easier.

When running a business, how can women incorporate their role as a primary caregiver to an elderly parent?

This can be financially and emotionally difficult, especially when paired with taking care of children and running a successful business. This is where long-term care insurance comes in, helping to ease the burden. Women should ensure their parents have long-term care insurance, even if they have to pay for it themselves. Oftentimes, care starts being required when a daughter is trying to raise her own family and her business is taking off.

When purchasing long-term care insurance, do the research to ensure a quality product. Certain companies are better with premiums and rate increases than others, and large annual rate increases can lead to unaffordable premiums. Financial stability of the insurance company is also important, as the need for the insurance may not arise for years.

The peace of mind acquired after confronting one’s own financial planning situation and working with a trusted adviser to put a sound plan in place is priceless, allowing you to focus on other things.

 

Nancy Kunz, CFP®, ChFC®, CLU®, is Lead Financial Planner with First Commonwealth Financial Advisors, Inc. Reach her at (412) 562-3232 or nkunz@fcbanking.com.

Natalia Paich, CPA, AIFA®, is Wealth Relationship Manager with First Commonwealth Financial Advisors, Inc. Reach her at (412) 562-3232 or npaich@fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh

When focusing on the day-to-day operations of your business, it’s easy to overlook planning for its future. And if your adviser doesn’t bring it up, you may never put a plan in place. However, having a well-thought out succession plan can ensure that your business continues after your retirement or death.

“It’s always a delicate conversation to have,” says Michael Dreveniak, vice president and wealth market leader with First Commonwealth Advisors. “Nobody wants to talk about when they are no longer here, but this is something that you have to do.”

It’s crucial to have answers for two questions, he says — what happens to the business if you are no longer around, and what happens in the event of your incapacity?

Smart Business spoke with Dreveniak about the importance of planning and how insurance can play a critical role in the process.

Why is succession planning critical to the continuity of a business?

There are risks associated with failing to plan. For example, when an owner passes away, there could be a lack of cash flow to maintain the business, which could result in a lower company value. And if the business isn’t well funded, it will lose key individuals and be unable to attract top talent to continue running the business.

The biggest misstep business owners make is failing to address this issue at all. Talk to your advisers — accountant, attorney and wealth manager — to ensure the best interests of your beneficiaries and heirs are considered. Your advisers are paid to walk through risks and anticipate them, providing ‘what if’ scenarios to ultimately arrive at a solution.

The classic example is the mom-and-pop shop that has been in business for 30 or 40 years and then closes its doors because the owner retires and there is no plan to continue the business. Proper planning could have allowed the business to continue running and the owners to accumulate additional wealth. Small businesses — classified as those with less than $7 million in annual revenue and fewer than 500 employees — represent  99.7 percent of all employer firms, and too many of those fail to create a plan.

When should business owners start planning and what steps should they take?

Five years is the perfect time horizon. Begin with the end in mind and allow financial professionals to ensure your balance sheet is cleaned up to maximize value. If the company is more attractive, you can receive top dollar and enable the parties involved to receive financing from a bank, other financial institution or investors. Then, evaluate the plan every year or two to monitor your progress.

Being proactive and having a well-designed plan can help with unforeseen future issues. When planning, prioritize what is most important to you, such as exit planning, income protection, retirement income, business protection, wealth transfer or survivor income. This keeps you from trying to tackle everything at once.

As your business changes — for example, you bring on another employee or your personal life changes — discuss it with your advisers so those changes are reflected in your succession plan.

How does a one-way buy-sell agreement work and why should a business consider it?

Many succession plans engage a well-defined buy-sell strategy, which dictates ownership going from the owner to another individual. It’s a key component of the planning process. With a one-way buy-sell agreement, if the owner of a company has somebody in mind — whether internal or external — who plans to purchase the company, there’s an agreement that he or she will buy from the owner upon some qualifying event, such as disability, death or retirement.

This works well where there is a sole owner, oftentimes for businesses with       $1 million to $5 million in annual receipts and fewer than 100 employees. The one-way buy-sell will dictate how the funds change hands to purchase the business. If the owner is not around, in many cases, it provides a way for the beneficiaries and heirs to be compensated.

How can life insurance assist with a buy-sell agreement?

If the person who is going to purchase the business buys life insurance on the life of the business owner and the owner dies prematurely or the plan is to transition at death, the insurance provides the funds needed to purchase the company quickly. It’s a plan to provide certain funding when needed.

How else can the right insurance aid with planning?

Business owners work extremely hard to grow their assets, so protecting them should also be a priority. After accumulating a large asset base, that money can go quickly for long-term care if something goes wrong with your health.

In Pennsylvania, the cost to be in a nursing home averages $8,000 per month, or $96,000 per year, for care in a semi-private room. If high costs erode your asset base, your beneficiaries or heirs are forced to have a fire sale of assets to raise money for your care. Long-term care insurance is a way to mitigate some of that risk, to transfer it to an insurance company as opposed to the owner.

Here is a final reason to ensure that you incorporate insurance into a defined plan. Though some business owners say, ‘I may never use long-term care insurance. I get no benefit and just pay out every month,’ properly placed insurance enables business operations to continue when the unthinkable occurs. Until then, it works to protect your assets and brings peace of mind so that you can concentrate on your business instead of worrying about the ‘what ifs.’

Michael Dreveniak is a vice president and wealth market leader with First Commonwealth Advisors. Reach him at (412) 518-1854 or michael.dreveniak@fcfins.com.

Insights Wealth Management is brought to you by First Commonwealth Bank.

Published in Pittsburgh