MassMutual Business Owner Perspectives Study

Women’s Insights

A Guide for Business Owners

“ It’s choice, not chance, that determines your destiny.”– Jean Nidetch, Founder of Weight Watchers

Contents2 | Start-up stage

Reasons for owning a businessSources of business financingViews on managing finances

5 | Growth stageTop business planning concernsFinancial product ownershipPlanning for retirement

8 | Maturity and transfer stagesViews on business valuationBusiness succession planning

Women own 7.8 million businesses, which account for 29% of all businesses in the U.S.1 These women have turned their dreams of business ownership into a reality despite the struggling economy and the rising cost of living. They are managing through the challenges of shifting consumer trends and uncertainties around taxes and health care. And, while most business owners have the same motivations for starting their businesses, women’s attitudes toward business finances differ from men.

There are four stages in the evolution of a closely-held business – start-up, growth, maturity and transfer. Our findings indicate that, depending upon the stage of the business, there are different concerns faced by business owners, and addressing those challenges may prove critical to ensure that a business thrives and survives.

This is particularly true for women business owners, as they showed greater concern about meeting long-term financial goals than did men. In addition, they tend to be more family focused, integrating their families into the business, and hope to one day pass on their businesses to their children. They are very entrepreneurial – 67% of women business owners are 1st generation vs. only 48% for men.

A 2011 study of business owners conducted by GfK Custom Research North America for Massachusetts Mutual Life Insurance Company (MassMutual) reveals that today’s business owners face many challenges in achieving their dreams. The research shows that most business owners want control over their finances and view planning for their financial future as very important. Yet, few are satisfied with their current financial situation.

Business owners and their businesses are the backbone of our country’s economy. In fact, small businesses in the U.S. represent the fourth largest economy in the world.2 As business owners, women have a major impact on the nation’s economy, employing more than 7.6 million workers in 2007.3 Among women business owners, the need for financial knowledge and preparation is paramount. The MassMutual Business Owner Perspectives Study takes the pulse of today’s business owners. The results provide you with an opportunity to reflect upon the successes and challenges in your business so that you can face the future, both in your professional and family lives, with greater confidence.

1 U.S. Census Bureau, Survey of Business Owners, 20072 CIA World Fact Book, Published 20103 U.S. Dept. of Labor, Bureau of Labor Statistics, 2008

22

Our study focused on three main topics for start-up businesses – reasons for

owning a business, sources of business financing, and managing expenses.

In the start-up stage, it’s all about validating the business model,

maximizing cash flow and minimizing risk, and acquiring the necessary

knowledge to be a successful business owner.

Women follow their dreams and start businesses based on their passionStarting a business is a very personal affair. For many women, this

is especially true because family is integrated into their business.

Not surprisingly, the main motivation for owning a business, like most

people who work for a living, is to provide financially for the family.

Digging a little deeper, other underlying reasons women choose the

path of business ownership surfaced. Being your own boss, having a

strong passion for a craft or trade, and having more control of time were

major motivations mentioned by about half of the female respondents,

highlighting the importance of the independent lifestyle that is afforded

by business ownership. The ability to follow one’s dreams, also

resonated strongly, which indicates that women are gaining confidence in

their abilities and want to achieve their goals.

Start-up stage

67% of women-owned businesses are first generation

Between 1997 and 2007, the number of women-owned businesses grew by 44%, twice as fast as men-owned firms, and they added roughly 500,000 jobs.4

Top reasons for starting a business

1 | To provide financially for family

2 | Be your own boss

3 | Have strong passion for craft or trade

4 | Have more control of life, time, etc.

5 | To follow one’s dream

4 Economics & Statistics Administration, Businesses in the 21st Century, Published October 2010

3

Using life insurance to collateralize a business loan

Businesses go through several stages of development and may require additional financing, perhaps to increase inventory, retool equipment, expand the building, or develop a new market. Lenders often find themselves reviewing many worthwhile loan applications, but many are declined due to a lack of adequate collateral. Life insurance as collateral is one option to close a business loan.

When a life insurance policy is used to collateralize a business loan, your lender retains “collateral assignment” of the policy while your loan is in effect. That means if the person insured by the policy (the business owner) dies while the loan is in effect, your lender has the right to claim a portion of the policy proceeds equal to the outstanding loan balance. Any remaining proceeds are paid to your beneficiary. Once you’ve paid off your loan, you can remove the collateral assignment and your lender will no longer have any rights to the policy.

Finances “keep women up at night”If starting a business were easy everyone would do it, right? The truth is

many business owners – male and female – are struggling financially, saying

“it’s all I can do to keep up with everyday expenses, let alone think too much

about the future.” In particular, women are not only more likely than men to

say that finances “keep them up at night,” (26% vs. 15% for men) but they

also are more likely to depend on credit cards, personal savings, and family

and friends to keep their business financially afloat. Ironically, women are

also more likely to try to manage the business expenses to avoid going into

debt (71% of women vs. 65% men). According to study respondents, the

sources their businesses depend on to stay afloat are:

This underscores the importance of being more educated on the different

sources of financing available to help business owners. As businesses

move from the start-up stage to the growth stage and beyond, it becomes

increasingly difficult for credit cards and friends and family to provide

financial support. It also becomes more essential for women to separate

their personal finances from their businesses’ and leverage the resources

and education necessary to make this possible. Creating relationships

with lending institutions and understanding the different sources of loan

collateral (such as life insurance) may prove to be critical for the long-term

sustainability of these businesses and, in turn, place less of a burden on the

family finances.

Financing source Men Women

1 Bank Loans 44% 37%

2 Personal Savings 31% 34%

3 Credit Cards 20% 29%

4 Family and Friends 11% 16%

5 Small Business Administration (SBA) loans 8% 12%

4

Women business owners are concerned about meeting their long-term goals and place a greater importance on relationships when thinking about financesAlthough business owners generally prefer a hands-on

approach when it comes to managing their finances – with

more than eight in ten saying they want to be actively

involved in all decisions regarding their personal finances –

only 43% of women business owners are satisfied with

their current financial situation. Furthermore, women

are more likely to feel worried about being able to meet

their long-term goals than their male counterparts even

though they report being confident in their ability to manage

their finances. Almost two-thirds (63%) say they are very

good at managing money.

When making financial decisions and future plans for

their businesses, women place greater importance on

relationships than men. In fact, they are more likely to

rely on their spouses (61% vs. 45% for men) and children

(34% vs. 25% for men) for business financial advice. They

also report making household decisions jointly with their

spouses (56% vs. 45% for men).

The preference toward building strong relationships is

also evidenced in dealings with financial professionals,

as women business owners tend to use the same person

for both their financial planning and insurance needs

(55% vs. 31% for men). Selecting a “point person” of

the advisory team – which may consist of an accountant,

attorney, financial professional, or others working together

to effectively manage and protect the financial interests of

the business – can help women to feel more comfortable

or confident in their long-term planning while helping to

ensure that their plans are comprehensive.

Views on finances Percentage who agree

Men Women

I want to be actively involved in all decisions regarding my finances 79% 83%

I manage my everyday expenses to avoid going into debt 72% 76%

I’m very good at managing money 56% 63%

I’m worried about being able to meet my long-term goals 19% 25%

I wish I were more in control over my finances 20% 24%

“ Finances and just the economy [keep me up at night]. It’s been terrible these past couple of years.”– female, business owner

5

common disconnect that occurs between what business

owners recognize as a concern versus actions they’ve taken

to solve their issues.

In addition, the lack of buy-sell agreements among

business owners is low, regardless of gender. It is

important to note that women business owners are less

likely to have a buy-sell agreement triggered by death or

disability than their male counterparts. Women shouldn’t

underestimate the impact of not having a written, signed

and fully-funded buy-sell agreement can have on their

businesses should the unexpected occur. Unfortunately,

women are more likely to become disabled – permanently or

temporarily – than men during their prime working years5,

emphasizing how essential a buy-sell agreement – to cover

the four D’s: death, disability, divorce and departure – is to

protect the business for the long-term.

Growth stage

As businesses grow, owners look to diversify their business

interests to augment cash flow, and thus, need to attract

and retain top talent and create a solid business plan to

protect the long-term viability of the business. Our study

looked at how business owners view key planning topics

in the growth stage, including key employee retention,

protection planning, and retirement income strategies.

A 35-year-old woman is 42% more likely than a

man to become disabled before age 65.5

Keeping key employees loyal is a top concern, but few are addressing the issueBusiness owners say keeping key employees loyal to the

business is their most common business planning concern,

yet less than a third of the respondents say they offer special

benefits to these key employees. This underscores the

Women business owners' planning concerns

Percentage who consider it a major concern

Percentage who have taken action to address the concern

Keeping key employees loyal to the business 49% 28% offer special benefits for key employees

How the business would be affected by the possible death of an owner or key employee 39% 24% have a buy-sell agreement triggered by death

of an owner

How the business would be affected by the possible disability of an owner or key employee 40% 20% have a buy-sell agreement triggered by

disability of an owner

Protecting assets from lawsuits, seizures, etc. 40% 31% have a business asset protection plan

Transitioning ownership or finding a buyer when owner is ready to retire 29% 28% have a formal business succession plan

Who will run the business if an owner leaves, becomes disabled, or dies 31% 28% have a formal business succession plan

Handling estate taxes in the event of an owner’s death 24% 45% have an estate plan

5 NAIC 1985 Commissioner’s Individual Disability Table A

6

0%

20%

40%

60%

80%

100%

Long-term Care Insurance

AnnuityIndividualDisabilityIncome

Insurance

InvestmentsQualifiedRetirement

SavingsPlan

Individual Life Insurance

25%

39%43%

73% 71%

85%

Percentage of financial product ownership among women business owners

Life insurance tops financial products owned, but maintaining independence of highest concernWhile the women business owners surveyed recognize the value

of life insurance as an integral component of their business and

personal planning, the personal planning issue of highest importance,

was protecting assets and remaining as independent as possible if you

require long-term care. Because women commonly assume the role

of caregiver for their kids, their parents, their in-laws, and eventually

their spouses, they want to have the proper insurance in place which

protects their assets and preserves their independence, while helping

relieve family and friends from the burden of providing care for them

later in life.

Women-owned businesses employed 7.6 million persons in 2007.6

6 United States Census Bureau, Survey of Business Owners 20077 Facts About The Family Owned Business, Cox Family Enterprise Center

Over 25% of family businesses expect a woman to be their next

executive director.7

7

Women business owners are concerned about not being able to meet their long-term financial goalsOn average, women business owners expect to retire at age 68, but less

than half feel confident they are doing a good job preparing financially for

their retirement. They are also concerned that they will not be able to meet

their long-term financial goals.

This lack of confidence could stem from the fact that women are not only

less likely [than men] to have figured out how much their households would

need to save for retirement, but they are also less likely to have developed

a plan for retirement saving.8 Perhaps more alarmingly, women business

owners were more likely [than men] to say that social security will be their

primary source of income in retirement, yet at the same time, only 5% of

women are confident that the Social Security system will continue to provide

benefits of at least equal value to the benefits received by retirees today.9

Although women respondents may feel their long-term financial goals

may be out of reach, they do plan to rely on the following for their

retirement income:

• Personal savings or investments

• Pension or qualified retirement plan

• Proceeds from the sale of the business

Creating a financial road map can help prepare the business for long

term success. “ [My main worry is] trying to find a way to retire without putting a whole lot of people out of work.”

– female, business owner

Percentage of women business owners with a plan in place

0%

20%

40%

60%

80%

100%

legend 1

College SavingsRetirement Income

FinancialEstate

14%

36%47%45%

8 MassMutual, State of the American Family, 20119 MassMutual, State of the American Family, 2011

8

Who determined what the business is worth?

Maturity and transfer stages

What to look for in a business valuator

A typical business owner misjudges the value of a company by 59%.10 That’s because business owners often use “rules of thumb” that assume one business is identical to every other business in that industry – the reality is every business is as unique as a fingerprint. Business valuation is not an exact science. It is based on the key financials of the business, market conditions, the industry in which the business operates, the nature of the business, and informed judgment. Many business owners choose to have a CPA conduct their business valuations. Be sure that any firm or individual you hire to value your business has the proper credentials, such as:

• Certified Valuation Analyst (CVA)

• Accredited Valuation Analysis (AVA)

• Accredited Senior Appraiser (ASA)

• Accredited in Business Valuation (ABV)

10 Spardata, survey of business owner clients, 2010

Once business owners begin to leverage the infrastructure they’ve built and

have senior leaders and key employees managing the day-to-day opera-

tions, the business has reached the maturity stage. Around this time, the

business owners may begin to recognize the need to start planning for the

next stage of their business and life. Perhaps they hope to pass the business

on to their children and retire, or maybe they will sell it and start a new

business venture. Regardless of what action is taken, the transfer stage

has begun. Our study looked at a few common concerns facing business

owners in these stages, including knowing what the business is worth,

succession planning, and choosing a successor.

Business valuations are very important to women, but they may not be going about it properly Almost half of the women business owner respondents feel that it’s

“extremely or very important” to know what their business is worth, and

nearly six in ten say they’ve had a business valuation done in the past

three years. More than half of women business owners have relied on

accountants to conduct the valuation, but one quarter have completed it

on their own.

A proper business valuation is thoughtfully crafted by a credentialed

appraiser after thorough research and is documented in writing. Having an

accurate business valuation can help eliminate conflict between a buyer and

a seller when an owner wants to transition the business, help business owners

better estimate their retirement nest-egg, and help prevent potential estate

tax issues. It’s recommended that a business valuation be updated at least

every three years.

0 10% 20% 30% 40% 50% 60%

Legend 1

Valuation Company

Self/Partners

Accountant 56%

24%

12%

9

Who is being named the successor of women owned businesses?

A Buy-Sell Agreement can help protect your business if an owner dies or becomes disabled

A Buy-Sell Agreement is a legal document that, when properly executed and funded, can help business owners to ensure the continuity of the business in the event of four D’s – death, disability, divorce, and departure – of one of the business owners.

This legal document ordinarily stipulates how much one business owner must pay the other’s estate or heirs for their share in the business should the triggering event (identified in the Agreement) take place – or the method whereby the business valuation will be determined at the time that the event occurs. It may also include other relevant details, such as the source of funding for any buyout that may take place (often life insurance or other financial products are used for this purpose) and who is eligible for payment under the Buy-Sell Agreement. Without a Buy-Sell Agreement, upon the death or disability of one of the business owners, the business may need to be sold in order to pay: 1) surviving owners for their share of the business; 2) estate taxes; and/or 3) business operating expenses.

Business owners, both men and women, have chosen a successor but few have a plan in place to make it happenMost of the women business owners surveyed say they have identified their

successor – in most cases it’s a family member – and almost nine in ten

claim that the individual knows that they have been chosen. In particular,

women are more likely to say that they plan to pass on their business to

their children than are men (45% vs. 36% of men). While this may not

come as a surprise, women business owners do need to have meaningful

discussions with their intended successor to ensure that their children feel

the same desire to keep it running successfully.

Regardless of the person named, only slightly more than one-fourth of

all women business owners surveyed say they have a formal succession

plan in place. This may be the case due to the fact that nearly two-thirds

of women business owners are relying on their attorneys to create their

succession plans. It’s important to remember that a true succession

plan is more than just drafted documents. It involves communication

among owners, family members and key employees, a strategy to choose

and develop a successor, and an orderly exit from the business when the

time comes. Chances are, the attorney is not addressing these important

succession planning issues.

0 10% 20% 30% 40% 50% 60%

Legend 1

Non-related key employee

I don't know

No one, will sell

Family* 59%

15%

14%

5%

* Of the family, 45% say son or daughter (or son or daughter-in-law).

WMI1559 612 CRN201406-161440

© 2012 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.

Determine your destiny As a woman business owner, the choices you make now will help to

determine the future of the business. A successful business begins with

planning for and building a strong financial foundation. Business planning

is not something that’s done overnight, but by taking small steps you can

begin to set your business on the road to a more financially secure future.

At MassMutual, we recognize the challenges you face and are equipped

to help you prepare for the future with more confidence. Our goal is to

help you stay focused on the task at hand – running your business – while

working in concert with your trusted advisors to help you create a financial

road map for the long term success of your business. In fact, we have

financial professionals who are trained to work specifically with business

owners like you.

Put our qualities of strength, experience and stability to work for

your business. To learn more about how MassMutual can help you protect

what you’ve worked so hard to build, visit massmutual.com to find a

MassMutual financial professional in your community. Take the next step

toward creating a solid business strategy and achieving fiscal fitness.

Methodology

The research was conducted by GfK Custom Research North America for Massachusetts Mutual Life Insurance Company (MassMutual) via telephone interviews administered to 916 general population business owners from March 28 – May 20, 2011.

Businesses were required to meet the following criteria:

· Have 500 or fewer employees

· 2010 total sales or revenue of $50,000 or more

· Been in business at least 1 year

The sampling margin of error for this study is +/– 3.3 percentage points when looking at the results for Total General Population. These are at the 95% confidence level.