Financial Advisors - It's Time for Some Difficult Discussions with Your Business Owner Clients

Record numbers of baby boomer business owners will be exiting their businesses over the next 10 years. Most of them have not done the proper planning in order to maximize the value or to pass it on to the next generation under favorable conditions. Financial Advisors have an opportunity to help their clients improve the outcome. This Post discusses the issues and the role of the trusted advisor in that process.


If this recent market meltdown has taught us anything it is to make sure you are diversified over several investments and asset classes. Would you recommend that a client put 80% or more of their assets into a single investment? Of course not, but a large percentage of your clients actually have that level of concentration. Your clients that are business owners likely have 80% or more of their family's net worth tied up in their business. On top of that, privately held businesses are illiquid assets often requiring one to two years to sell. So for your baby boomer business owner clients, it is time to have some tough discussions. It is time to move your financial advisory practice beyond the scope of a provider of financial products to an advisor on family wealth maximization solutions.

Business owners are typically not proactive when it comes to exit planning or succession planning in their business because it forces them to embrace their own mortality. Well, they just need to get over it. If an owner has a sudden debilitating health issue or unexpectedly dies, instead of getting full value for the company, his estate can sell it out of bankruptcy two years later for ten cents on the dollar. This is a punishing financial result for the lack of appropriate planning.

Statistics on Business Exits

· According to Federal Reserve's Survey of Consumer Finances, in 2001, 50,000 businesses changed hands. That number rose to 350,000 in 2005 and is projected to increase to 750,000 by 2009.

Some estimates place the value of businesses transitioning to new leadership over the next ten years at $10 TRILLION. The Price Waterhouse Trendsetter Barometer Survey shows that nearly 65% of CEO's plan to retire within ten years or less:

· 42% within 5 years. 51% of those plan on selling to another company while 18% plan on a transition to family members and another 14% plan on a management buyout.

· Only 22% have done a great deal of succession planning and another 26% have done some. But 24% have done little, and 19%, virtually none. 9% did not report.

· Only 39% percent of CEO's have a likely successor in mind, but less than two-thirds of them say that person is ready to take control today.

But among those planning to sell their business, far fewer have explored the following opportunities:

· Only 36% have planned how to increase after-tax proceeds;

· Only 35% have developed an investment strategy to protect and manage their monetized wealth

Questions You Should Be Asking of Your Business Owner Clients

In your role of providing a holistic approach to maximizing your client's wealth, you should be asking these questions:

· What are your plans for your business when you retire?
· Do you have children that you want to take over the business?
· Have you determined how you are going to transfer the ownership?
· Do you know how much your company is worth?
· What % of your family's net worth is in your business?
· In your business life, what keeps you up at night?
· If you were hit by a bus tomorrow, God forbid, what would happen to
your business?

In your role of trusted advisor, you simply must ask these difficult questions and guide your client in exploring options and planning for his eventual exit. Before he just assumes that the torch will be carried by the next generation, make sure that the next generation even wants to run the business. Imagine the loss in value that would have occurred if the real estate billionaire from the western suburbs of Chicago had turned his empire over to his son who simply wanted to produce plays.

Are his heirs even capable of running the business? Has he held on to the reins so tightly that the kids involved in the business have not been able to develop their decision-making or leadership skills? Do they command company respect because of their personal strength and skills or are they grudgingly granted respect because they are the child of the owner? If that is the case, the odds are not good for them taking over when he retires.

The business owner must make some difficult decisions when he or she decides it is time to retire. Why did he create this business? Was it to keep this business in the family for generations or was it to provide for his family for generations? If the desire and the capability of the children are not evident and the company is large enough, it may be the right decision to first get outside board members actively involved as step one. Step two would be to hire professional management to run the business.

A second alternative is to sell the company while he is still running it and it can command its highest value. If he has children that want to remain in the business for the immediate future, incorporate that into the sale agreement with employment contracts.
Another way to ask your client to think of it is, while I am running the business, the best ROI is to keep the bulk of my net worth invested in this company. If I am no longer running the company what is the best risk reward profile for my net worth? Would my heirs be better off if the business was sold and the value converted to financial assets?

Many financial advisors feel uncomfortable having these types of discussions with their clients. Because of the business owner's reluctance to plan for his business exit, you should actively get out in front of the process with your client. This decision and how it is executed will be the single most impactful event in your client's financial future. You can take on the quarterback position in assembling a multidisciplinary team that can include:

The Financial Advisor - Coordinate all the pieces for a holistic wealth maximization plan

Attorney - Create the necessary documents, wills, trusts, family LLC's, corporate structure, etc.

Estate Planner - work with financial advisor and attorney to create the properly documented estate roadmap

CPA/Tax Advisor - review corporate structure, analyze after tax proceeds comparison of various transaction structures, create tax deferral and tax avoidance strategies

Investment Banker/Merger and Acquisition Advisor - Analyze the business, create value creation strategies, position the company for sale, and create a soft auction of multiple buyers to maximize selling price and terms.

As your business owner clients approach retirement, you need to help them with investment decisions that employ sound diversification and liquidity strategies. Their business is generally the largest, most illiquid, and most risky investment in their total wealth portfolio. Their successful business exit should be executed with the same diligence, knowledge, experience and skill that you regularly apply to their other asset class decisions.

Please contact us for a free white paper on this topic.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist