Many successful advisors pride themselves on being quick studies of prospects. That facility can be particularly valuable when dealing with clients for whom the word speed is writ large: business owners of fast-growing companies.
The obstacles that producers frequently confront when working with these individualsa frenetic work pace that leaves little time for client discussions; volatile market conditions that can up-end financial plans; and the tendency of owners to give greater priority to short-term operational objectives than to long-term financial planningcan tax the skills of even the best advisors. But the rewards can be just as great.
“We have clients that were doing $20 million in sales when we came on board,” says Nathan Perlmutter, president & CEO of Forest Hills Financial Group, Rego Park, N.Y. “Many now are garnering $1-plus billion in sales. If you stay on as a trusted advisor, the long-term relationship is absolutely more fertile and potentially more lucrative if you can deliver over time.”
To be sure, the planning needs of fast-growing companies largely dovetail with those of other small businesses, particularly at an early stage of development, say experts. Among the requirements are a living will, durable power of attorney, health care proxy, and defined benefit or qualified retirement plan. Then there are the insurance needs: disability and health insurance; life insurance to fund executive benefits and a buy-sell agreement.
Indeed, experts interviewed by National Underwriter see greater parallels among early stage small businesses, irrespective of their rate of growth, than they find among young companies and those settling into a more developed phase. One point of differentiation: succession and estate planning. While a high priority among older business owners, these issues tend to take a back seat at newer companies.
“Exit planning is typically last on the new business owners list of things to do,” says Dwight Raiford, a financial planner with the strategic planning group at MetLife, New York, N.Y.
The planning gap, observers add, is still more accentuated at firms experiencing rapid development. A January 2005 “Trendsetter Barometer” survey from New York-based PricewaterhouseCoopers lends credence to this.
CEOs of most of the surveyed firms364 privately held companies identified in the media as the fastest growing U.S. businesses during the past 5 years and with annual revenues ranging from $5 million to $150 millionsay they are likely to step down in the next 10 years. But almost half have given little consideration to succession planning.
Most of the business owners (51%) anticipate a sale to another company. Others are planning a sale or transition to next-generation family members (18%); a management buyout (14%); and an employee stock-ownership plan or ESOP (7%). A smaller percentage cited an IPO or other options.
Yet, the survey notes that only 22% have done a significant amount of succession planning. What is more, only 39% of the CEOs have a likely successor in mind. But less than two-thirds say that person is ready to take control. Approximately 45% identified no successor.
“In some respects, these business owners may feel conflicted about succession planning,” says Rich Calzaretta, leader of PricewaterhouseCoopers Private Company Services practice. “Because many have come to see it as part of their persona, they often cannot face the thought of stepping down one day. And those who expect to sell to another business may be more likely to see succession issues as the buyers responsibility.”
Often, however, the challenge for advisors dealing with fast-growth companies is not about getting the owner to face uncomfortable issues but rather securing the owners ear.
“I sometimes have to force them to set aside time to create a basic floor of protection and order out of chaos of their business life,” says Dana Barrows, a financial representative and director of business and estate planning at Northwestern Mutual Life, Milwaukee, Wis. “I just try to slow the person down by saying, Look, if disaster strikes, and you exit, I want you to exit in an orderly fashion. Because when youre gone, Im the one now dealing with your family.”
Advisors say a good time to meet with owners is between 7 a.m. and 9 a.m., before their day starts. Still better is a rendezvous away from the office, where they wont be distracted. After working hours is also a possibility.
But Perlmutter notes that owners of hot-growth companies tend not to have a “9 to 5 mentality.” They often spend long hours after employees have left the office discussing strategic and operational issues with other principals of the business.
Producers also describe the individuals as variously possessing tremendous drive and energy; highly intelligent and forward thinking; frequently impatient; and risk-takers who are prepared to make mistakes to achieve a result.
But gambling on business strategy doesnt necessarily translate in equal measure to pushing the envelope with the financial plan. The tendency of small business owners, in fact, is to be conservative with personal investments and retirement planning, limiting high risk to the business.
“These guys understand the purpose of spreading investment risk through asset allocation,” says Anthony Domino Jr., president of Associated Benefit Consultants, White Plains, N.Y., and president of the Society of Financial Services Professionals. “They also tend not to take risks in plan design. They dont need legal, tax or bad PR risk on top of everything else.”
While taking a conservative posture with personal planning, owners of best-of-breed fast-growth companies are also extra generous with employee benefits, say market-watchers. They understand the need to attract top-flight talent to maintain profitability before and after their departure. Theyre also inclined to treat staffers as “internal customers” whose loyalty to the firm will lead not only to higher retention and productivity rates, but also more satisfied external customers.
The difference in attitude might manifest itself in higher corporate-paid contributions into a deferred compensation, SERP or executive bonus plan for key employees; greater flexibility in plan designs; or the use of innovative funding techniques (such as premium financing) when cash is hard to come by.
The last might well come in handy. To sustain their expansion, many small companies plow so much revenue or borrowed capital back into operations as to leave little money for financial planning objectives.
One solution for funding a nonqualified compensation plan, says Perlmutter, is to purchase term insurance with a guarantee issue rider that allows the owner to convert to a permanent insurance policy once the companys cash position improves. A guarantee issue rider (or, alternatively, over-insuring) might also prove of value with disability policies. As an executives income grows, the rider can be exercised annually so coverage requirements keep pace.
“I often talk about the need for some [insurance] benefits to be like a pair of shoes that are just a little too large,” says Paul Love, vice president of Foster, Soltoff & Love, Ltd., Bethesda, Md. “Over time, the company will grow into them.”
To be sure, the insurance agent or financial planner need not be the advisor recommending the policy. Barrows says that having the owners attorney or accountant take the lead frequently makes the sale easier. Recommending against insurance also can prove advantageous.
“I once suggested self-insuring dental coverage to a start-up employer, noting that dental insurance would not be the best buy,” says Michael Gerkman, president of Gerkman Insurance & Financial Services Inc., a Wilsonville, Ore.-based affiliate of Symetra Financial Marketing, Redmond, Wash. “At that point, the owners trust in me, an insurance agent, went way up.”
That trust, observers say, ultimately will keep the advisor in good stead with the rapid-growth company as it matures. But gaining the owners confidence generally will require more expertise than the advisor alone can deliver.
Hence the need to assemble a competent team of specialists: CPA, tax attorney, and, where necessary, experts in trust, estate, succession, pre-retirement or executive compensation planning. The advisor must take care, too, to strengthen the relationship with the small business owner through regular meetings and monitoring of the financial plan to ensure it remains current.
They should also demonstrate an active interest in the business. Advisors would be well served, says Barrows, always to accept invitations to see company facilities, such as manufacturing plants, as theyre built or expanded.
Relationship building, however, has its limits. The market volatility to which many small businesses are prone can play havoc with the financial plan, experts warn.
“My advice to producers is buckle up; youve got to be willing to love the roller coaster,” says Raiford. “And you better write the plan with a pencil and good eraser because end objectives tend to change. Working with fast-growth companies is sometimes like putting wheels on a train while its going down the track at 90 miles per hour.”
Conversely, success in attaining growth targets may avail owners of the opportunity to merge or be acquired by another firm, or go public through an IPOpotentially displacing the advisor.
Says Love: “Unfortunately, mergers and acquisitions are part of the job. You just have to hope you are on the side of the company doing the acquiring.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.