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 1,000,000 by 20015. 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?
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.
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