This week, I had the chance to sit down with Todd Grandy, a Chartered Life Underwriter (insurance specialist) and wealth management advisor at Northwestern Mutual, and ask him about the challenges business owners face in risk management. Todd and his firm specialize in helping businesses and their owners address the unique risks they face every day. Read on to hear what he has to say...
- What are some of the unique risks that business owners face? In addition to building a successful business, overseeing employees, and dealing with customers, business owners have a number of unique risks. One risk is that many business owners have special capabilities, knowledge and or industry contacts that make them particularly critical to the long term success of the business. In my world, we refer to this as ‘key person risk’. Key person exposures can manifest in a couple ways, most profoundly in the event of premature death or disability—and either scenario can be devastating to a business.
Another unique risk that owners face is ‘buy sell planning risk’—especially for those owners who have co-shareholders. Again, like key person risk—buy sell planning risk is particularly acute in the event of a premature death or catastrophic sickness or injury. That said, an owner who just wants to quit—can face the risk of financing his or her exit—for which a sinking fund or similar cash equivalent can be helpful.
Another risk owners face is setting up benefits to attract, retain, reward and protect their employees (including themselves, if only on the latter point (‘protecting’). Most basic ‘benefit plans’ do a good job of protecting rank and file for health insurance, life insurance and disability insurance purposes, however these plans typically leave the owner exposed, especially if they are making a good income. Similarly, ‘basic’ retirement plans usually do not accommodate the savings and tax planning needs of the owner—so some type of supplemental plan can make sense.
A final risk business owners can face is that of living a long life, and needing some type of care. And while many business owners can accumulate significant wealth to address these sorts of ‘long term care’ expenses—many would prefer to transfer this risk off of their personal balance sheet—and pay for these expenses with discounted dollars (using insurance). Needing care, and its associated cost is a big concern for many business owners, and hedging these risks is an important planning consideration.
- How do you help business owners mitigate or eliminate those risks? Our firm has spent nearly 30 years helping businesses and their owners to address the unique risks they face every day. Specifically, we are expert in designing, implementing and administering insurance programs to hedge key person, buy sell, personal life, disability, and long term care planning risks. Additionally, we are expert in the design of executive benefits to attract, retain and reward key talent, in addition to policies to provide liquidity to address estate taxes. We are experienced and credentialed professionals, who work collaboratively with other planning experts (like the teams at Bay Point and Stein Sperling).
- Given that entrepreneurs are usually risk takers, do you ever find them to be resistant to insurance? In other words, they would rather just tolerate the risk. How do you help them to see the benefit of a good risk management strategy? Entrepreneurs, almost by definition are risk takers. That said, we find as we educate our clients to the exposures they face—and how various insurance strategies can address (or ‘hedge’) these risks, that generally business owners will follow our recommendations. I find part of their ultimate agreement to follow direction is a by product of their being educated, our balanced approach to risk management (not trying to cover all risks from the first dollar), and the fact that their other advisors are making similar observations with respect to their planning (there is a chorus of folks telling the business owner to insure various risks—even if only ‘partially’).
- Besides risk management, what are some of the other benefits you offer business owners? Outside of our core competency in risk management, our firm is exceptionally skilled in designing, implementing and administering employee, executive benefit and retirement plans (both qualified and non qualified). We find that having the competency to both address the needs of the business owners, his key personnel and rank and file employees needs is a significant advantage.
- If you could offer one piece of advice to business owners, what would it be? Delegate nuanced aspects of planning to a team of ‘planning’ experts sooner than later—and listen to these experts. You have spent years and years becoming successful in your business, don’t expose the business and or your family to planning missteps, or worse yet significant errors—that could have otherwise been avoided.
We hope you found this interview helpful. For more information, come to the Business Owner’s Dilemma workshop on June 22. See all the details on our events page.