Creating tailored financial strategies for small-business owners in niche markets

Understanding their concerns and challenges can aid financial professionals in helping clients make a plan

Running a construction business is not the same as operating a technology company – business owners in different industries have different concerns. This means the most effective financial strategies for an owner of a small retail business will likely vary from someone who owns an agricultural business. A financial professional can tailor how they approach small-business owners depending on their industry.

Here are a few circumstances and ideas to consider


Succession planning

While all small-business owners need to have a succession plan, some strategies are better suited for certain industries.

Overall, the most common transition plan is sale or gift to family members across all industries – construction (65%), manufacturing (56%), agriculture (65%), technology (47%), retail (67%), and professional services (50%), according to a recent Allianz Life Insurance Company of North America (Allianz Life) study. Business owners in technology are the most likely to sell to employees (27%), while those in manufacturing are most likely to sell to an outside third-party buyer (23%).

When that transition will take place also varies by industry. While 30% of retail business owners said they expect to transition ownership in the next five years, business owners in construction (15%), manufacturing (15%), and professional services (11%) were more likely to have longer timelines.

The differences in planning for the future go beyond who will take over. For example, businesses in the construction industry need to consider how they will obtain surety bonds that are required for government and major private contracts. Surety providers want to see a well-developed and maintained business continuation plan. Having a properly designed and sufficiently funded buy-sell agreement and a potential solution – such as fixed index universal life insurance (FIUL) policies on key employees and the business owner – may work in the business’s favor.


Attracting, retaining, and motivating key employees

Small- and medium-sized business owners are facing a tight labor market. According to the study, business owners in all industries said they are having difficulty attracting or recruiting key employees. Business owners in manufacturing (87%) and technology (88%) were more likely to say they were having difficulty than those in construction (62%).

Key employee compensation plans can be designed to help those business owners navigate the labor market, and attract, retain, and motivate employees.

For example, 50% of technology small-business owners said they have key employee compensation plans in place that involve grants of stock, nonqualified stock options, or a similar plan. Companies in other industries provide such plans at a substantially lower rate – agriculture (31%), retail (32%), and construction (37%).

Compensation plans may include bonus plans, split-dollar plans, nonqualified deferred compensation and phantom plans stock, with funding assisted by FIUL policies. Remember that selecting an effective strategy requires understanding what will attract and retain employees in different industries or roles.


Tax implications

The tax burden for businesses varies among industries. For example, companies in professional services typically have fewer deductions than other industries, while fast-growing technology companies may be more concerned about capital gains than income taxes.

For this reason, business owners may have different needs for an FIUL policy. A fast-growing technology company owner may be interested in the tax-efficient aspects of FIUL policies. At the same time, a professional services firm owner may want to build accumulation value for supplemental retirement income1 through policy loans or withdrawals2 and provide death benefit protection3 with an FIUL policy.

*Allianz Life conducted an online survey, the 2022 Small-Business Owner Survey, in April and May 2022 with a sample of 516 owners of small- to medium-size businesses.

1 FIUL is not a guaranteed source of retirement income.

2 Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.

3 The death benefit is generally income-tax-free when passed on to beneficiaries.

FIUL requires qualification through health and financial underwriting.

For financial professional use only – not for use with the public.

Allianz Life Insurance Company of North America does not provide financial planning services.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.

Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. www.allianzlife.com

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.950.1962