Christine Moriarty, a certified financial planner based in Bristol, Vt., recalls one client, a computer business owner, who had been trying to live on a tight budget without any form of long-term planning. He was wreaking havoc on himself. “He had paid himself $500 a month in salary, which he couldn't live on,” Moriarty recalls. “Then he'd panic, and then he would go into his business to pull out more money.”

It's not that the business owner was raiding the kitty for wild expenses. “He did not have extravagant personal needs; it was just that he hadn't thought it all through. It was always knee-jerk reactions, he had to keep pulling more and more money out,” she says. So Moriarty sat the owner down and asked him to map out his expenses. “I said, ‘What do you need personally?’ and ‘Can we take that out of the business once a month, instead of just throwing the business into chaos?’” The end result was order — the entrepreneur began taking out rationed, adequate salary payments and was even able to set up a savings account for his business.

Dealing with such a situation is a regular task for advisors who focus on small business owner clients, whether it be a one-man law firm or someone who sells farm equipment. They are both a rep's most loyal clients and their most exasperating. Many entrepreneurs work seven-day weeks and go heavily into debt to pursue their dreams — often at the expense of their own financial well-being.

Advisors say that entrepreneurs are often poor investors, either due to too-risky strategies with little diversification or, worse, not investing in anything besides their own business. They often don't know how much to pay themselves; they often neglect their retirement plans and may not seek to understand applicable IRS rules (and pay the price later). Cash management can include taking a couple hundred dollars out of the company funds for emergencies, with a scribbled note being the only record. It means sometimes having a bookkeeper who is in over his head but is kept on because he is a friend of the family.

When meeting with an entrepreneur client for the first time, Peg Eddy, a CFP at San Diego-based Creative Capital Management, likes to ask: “So, what is your end game?” She adds: “That usually will stymie the most sophisticated entrepreneur. Their business is like a second child to them, it becomes their alternate identity. And thinking, ‘How am I going to get out of here alive?’ is not on their radar.”

What can an advisor do? Reps say that when dealing with small business owners, the best strategy is to serve first as a reliable third-party voice — providing objectivity in an environment where that quality is sorely lacking. It may not be the most profitable of services, but the potential is there to establish a solid relationship that could turn lucrative later on, when the business is established and the owner is ready to make serious investments and needs serious estate-planning advice.

WORKING IN STAGES

There are a few natural stages of a small business's life, and advisors say that each one requires a different set of services. There's nothing more futile, for example, than trying to convince a business owner who is spending every waking hour at his company that he needs to diversify his investments. Chances are, the entrepreneur has nothing to put away.

“When you have five employees and have under $1 million in revenue, you're still at the point where all your spare dollars are being reinvested in your business — you're not thinking at all in terms of your own personal investments,” says Peter Vessenes, who co-runs Vestment Advisors, a Shorewood, Minn.-based consultant that provides training — in particular for working with entrepreneurs — to financial advisors.

One area in which a struggling entrepreneur needs help, however, is in tax management. Moriarty knows from experience: Before starting out as a financial planner, she used to audit small businesses. “I found that few of them were any good at keeping their books. It was clear to me that they were in desperate need,” she says.

It is estimated that at least 50 percent of new businesses fail in the first year of operation, and one reason is mismanaged tax payments, advisors say. And once an entrepreneur falls behind on taxes, it can become an insurmountable burden. Moriarty had one client, who had been in business for about three years, tell her, “We're not paying this year's taxes because we're still paying last year's.”

The potential for a long, profitable relationship is laid during those critical early meetings, reps say. Scott Oeth, a CFP with Midwest Investment Advisors in Edina, Minn., for example, had a husband-and-wife team of business owners who wanted him to handle one specific issue — they needed to find someone to shore up their books.

“They were very concerned that the person they had doing their bookkeeping was not up to the task,” he says. “So I helped them set up interviews with contacts I had in accounting firms, and we got them an outsourced CFO to really tighten up their financial controls. It didn't put a dime in my pocket, but the issue was a main concern of theirs, and it has helped them in other areas.”

The more trust you earn with the entrepreneur, the more business will come your way, Oeth adds. “If you can be viewed as someone who can help screen other advice-givers, that is a huge benefit to the client,” he says.

STABILIZING THE SHIP

Once a business gets solidly off the ground, which Vessenes estimates as being when revenue-per-employee reaches about $100,000 annually, or about $2 million in total revenues per year, that's when an advisor can truly prove invaluable. “The place where advisors do well is where a company gets up to 20 or more employees. By that time the principals are making a six-figure income and are at the point where they are trying to add long-term value to the organization,” he says.

What an advisor can do is make sure that the business has been assembled in a way that a random act, like an illness or a shutdown, can't cause catastrophic harm to the owner. “It's our job to put up the safety nets while they're on the high wire,” says Eddy, the CFP from San Diego. Among the questions she asks clients: “Do you have a good grasp of your cash flow? What is the business needed to fund a retirement plan and an income to cover your normal fixed expenses?”

Small business owners often overlook important protections, such as disability insurance coverage, or business interruption insurance — the latter, in particular, is vital. “We're not funding any type of investment plan if your business shuts down for nine months and you can't operate,” she says. Advisors also need to get their clients to write up what she calls an “emergency fire drill” plan — essentially, a list of information employees need to know, such as who is in charge and how to pay bills in the event the owner is incapacitated. “So that if life interferes, the business doesn't fall apart.”

Advisors also suggest beefing up protection against legal risks. For example, Oeth had one client who was a part of a four-person anesthesiologist practice and wanted to set up a tax shelter to protect his pensions in the event he was sued. Oeth helped him set up a plan where “they put away a quarter of their income on pretax basis in an ERISA-protected account. It is one of the most protected types of assets they can have.”

Once those issues are settled, diversifying investments then becomes paramount, reps said. Shoveling all spare dollars back into the business makes sense at the outset, but when that strategy creates an enormous, exposed and undiversified investment for the entrepreneur, there's serious risk involved.

“It is not uncommon to see people with businesses worth somewhere between $4 million to $6 million and they don't have $10,000 outside of it,” Oeth says.

CALLING IT A DAY

Mark van Mourick, a financial planner who runs Optivest in Laguna Niguel, Calif., specializes in helping entrepreneurs reach the “selling” point. Of his roughly 40 clients, almost all are now-retired small businessmen whose golden years he has helped set the stage for.

“Their business can do two things for [owners] — provide money during the years they operate [them] and, hopefully, a lump sum when they sell them,” he says. Van Mourick's rule of thumb for a small business owner's comfortable retirement is that after paying off debt, including all home loans, the client should have two or three times the value of his home in investments that throw off cash flow (usually at least $1.5 million in assets). To get there, he tells them: “Put as much as you can into passive income,” referring to income derived from real estate and investments in which the entrepreneur is not actively involved (which tends to be more tax-favorable). “The more passive income I have, the more I can save. Get it snowballing in the right direction.”

Ultimately, he advises clients, “I'd like you to get to the point where you can save 100 percent of your salary and live off your investments. It's something to work for. That way, anything that you sell your business for would be gravy.”

That's sometimes not an easy goal for entrepreneurs, advisors say. For one, those small business owners who paid themselves a pittance during their working years could wind up getting hurt because they won't collect that much in Social Security payments.

And because entrepreneurs are so entwined in the businesses they have grown, selling them, can be very hard to do. Showing a business owner the value of his company — the potential lump sum from a sale — can focus the mind. For Peg Eddy, it is becoming a matter of practicing what she preaches. Eddy, who, along with her husband Bob, has run an advisory practice for over 30 years, is now thinking of calling it a day. “We're working on our own succession plan,” she says, adding she plans to hire some new professionals over the next few years with the intention of ultimately shifting the client burden to a new generation of planners.