From the January 2010 issue of Boomer Market Advisor • Subscribe!

Estate planning for your business

Enough with statistics.
A zillion boomer business owners worth gazillions of dollars are looking to transition out. Why aren't you helping them?

Here are the reasons you should ...

Like so many other things, the economic crisis has complicated the exit planning business.
Boomer business owners rightly feel that now might not be the best time to retire. How is it affecting the best laid plans of relatives, key-employees and third parties with a stake in the plan? How does it differ from past exit-planning environments? And how can advisors get in on the exit planning movement?

We asked Greg Banner, CFP and vice president of San Diego-based Asset Preservation Strategies Inc., these questions and more. The Securities America-affiliated advisor headed down the hall and dragged his frequent collaborator, estate planning attorney Alejandro Matuk, in for the conversation.

Banner joined the firm in 1993 and is a graduate of the Advanced Wealth Strategist Planner program at Michigan State University. He is also a Fellow of the Southern California Institute, an organization of like-minded industry professionals, where he teaches financial, tax and business planning. He specializes in working collaboratively with other advisors and their clients in advanced business planning, business exit strategies, investment management, advanced executive planning and more.

Matuk, a former distirct Attorney in San Diego, is also a Fellow at the Southern California Institute. A litigator for 30 years, he began specializing in estate and exit planning 20 years ago.

Boomer Market Advisor: We've heard so much about this great wave of baby boomer small business owners looking to transition out. With the state of the economy, are you still seeing that wave? Has it dried up? Increased? No effect? What's going on?
Gregory Banner:
We had a case where two employees bought into a company about two years ago. The owner came back and said he's looking at his future with a lump sum payment coming due next year. He came to the realization that soon he was out. What was he going do? The funny thing is he has a lump sum coming and he's afraid he can't control himself in terms of spending it too fast. He wanted to look at some other options to extend the terms out and different ways to structure the deal so that he can remain with the company and continue to work. He wants a place to go every day. So the wave you described will still happen, but people's plans changed dramatically. They thought they were going to be exiting in the next year or two. All of a sudden the clock's been pushed back and they don't know how long it's now going to be.

BMA: How early do you begin working with these small business owners before the transition date arrives?

Alejandro Matuk:
The sooner the better. In the old days I would create a business plan for someone, give them their books and say "good luck, enjoy your life." They'd come back to me on another business matter and their book would look the same as the day I gave it to them. So that led me, 25 years ago, to realize that I had to start working with clients from the very beginning; not just in the organization but the planning. I use the term "estate planning for your business." You don't plan on dying next week but you should be doing that same kind of comprehensive planning and giving it the same attention and respect as you give to your family, because it is going to be a source of money for your family.

Alex and I do a lot of teaching to other professionals. If you ask estate planning attorneys behind closed doors, "how many of you have business owners as clients that you neglect the business because you're worried about the liability issues." And two-thirds raise their hand. The extent of their planning is just saying "Oh, you have this thing out here and it has a value and we have to figure out if there's going to be some estate context based on that." It's amazing how many people are afraid to work with businesses, or simply ignore that portion.

BMA: Your client said, "I don't trust myself with my lump sum payout. And I don't know where I'm going go every day." How often does that happen?

That's the first time. This guy was living the high life and had some very unreal expectations. He thought, "I worked 20 years building this business and I'm going to take a million dollars out each year out of this for the rest of my life." And then reality hit. He was like "Oh, my God! A year from now these guys are paying me off and I'm out of the business. What am I going to do?" There are a lot of business owners that have that fear.

AM: We have another case with an elderly couple and the wife was the owner of the business. She was in her mid-70s and had inherited the business from her first husband in the mid-1960s. They wanted to transition it to her son from her first marriage. One of the things we provide is clarity of their objectives and we help them prioritize. Greg and I started talking to them and it turns out the son had a heart condition. When they came in it was, "We have a really simple situation. We just want to pass this business on and start transferring this to our son." And it was probably several hours into a meeting that we found out the son had had this major heart attack. It turned 180 degrees because of that.

BMA: Are lump sum payments the norm? Can the buyers come up with that type of cash?
If you do exit planning, it's a natural progression to go down the path of transferring it to your children. The reality is the majority of mom and pop businesses are under $20 million dollars. They don't have a capital market to go to. They need to transfer it to their children, or key employees, none of whom have money. I think that's the hardest thing for a business owner to grasp, especially if you're talking about a transition and not a sale. It will be the cash flow from the business that will help drive that owner's exit. Trying to get them to comprehend it, that they're going to have give it up that cash flow at some point in the future, is difficult.

BMA: How receptive are clients to the concept of exit planning in the current economy?
The typical client comes in with arms folded across the chest, and an attitude of, "what can you do for me that I can't already do myself? Charge me how much?" By the time we're done the value we add and the things we uncover pays for our services five-fold.

GB: There's a huge opportunity right now for clients and advisors to begin the transfer planning process. Every business owner you talk to needs help and there's no one giving them the kind of advice they need. There are people that hold themselves out as exit planning strategists. But I say unless you've got a team working for you you're not one, because no one person has all the answers. They have to have a minimum of a financial planner, attorney and a CPA. And the added bonus is that we feed off of each other. I can't tell you how many times Alex has come up with the great financial idea or I'd come up with a legal idea. And every business owner should have meetings with all their professionals sitting at the same table, so they know everyone is in alignment, reviewing everything from estate planning to the integration with the business to valuations to updates of buy-sell agreements, all of those different factors. There's some much value that can come from those meetings in the avoidance of potential issues and liabilities that would otherwise arise.

AM: It is much easier to have someone who's had a health episode or had a parent pass away, some kind of personal experience with the need for estate planning. In today's economy, it's much easier for advisors to go out and raise these issues. They may still get some push back, but if they have a strong message and deliver it with clarity, it's much easier to get the business owners to understand that they need exit planning for today, tomorrow and for their eventual exit. The economy has forced them to look into the abyss.

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