Most Business Owners Have a Serious Asset Allocation Issue

If several market meltdowns have taught us anything it is to make sure you are diversified over several investments and asset classes. Would your financial advisor recommend that you put 80% or more of your assets into a single investment? Of course not, but a large percentage of business owners actually have that level of concentration. 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, it is time to recognize the importance of planning for your business exit or business sale. It is time to move your thinking about your business from the method to provide income to your family and start thinking about it in terms of wealth maximization.  Above is a graphical comparison between a business owner and another high net worth individual. 

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. 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.

There are many complex issues involved in a business transition or a business sale. Poor decisions at this critical time can result in swings of hundreds of thousands or even millions of dollars. If you can take away one thing from this, it would be to actively get out in front of the process with your professional advisors. This decision and how it is executed will be the single most impactful event in your family’s financial future. You should consider 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 maximization strategies, position the company for sale, and create a soft auction of multiple buyers to maximize selling price and terms.

 As business owners approach retirement, they often seek help with investment decisions that employ sound diversification and liquidity strategies. Your business is generally the largest, most illiquid, and most risky investment in your total wealth portfolio. Your successful business exit should be executed with the same diligence, knowledge, experience and skill that you have regularly applied to the organizing, running and building your business.

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