While the varied and complex financial planning requirements of small businesses are challenging enough for most advisors, those needs acquire far greater significance when the very existence of the business depends on fulfilling them.
That knowledge can sorely test the abilities and objectivity of even the most skilled advisors. But when the advisor’s counsel leads to a positive outcome, say sources interviewed by National Underwriter, the experience can be highly rewarding, both financially and emotionally.
“You have to be extremely patient and flexible when working with troubled businesses,” says Wayne Minnich, president of Applied Financial Concepts, Richard, Ohio. “If you’re successful in helping them through a trying situation, that client will be yours forever. There’s great gratification in knowing that.”
For many businesses, the challenge is how to stay afloat in a deteriorating business environment. Whether due to volatile market conditions, poor strategizing, fraying relations among partners or a death of a principal, the business has, among other things, to deal with dwindling financial resources.
Apart from affecting business operations, poor liquidity can severely impact the ability of the business to retain key executives and provide for an orderly transition to new management. How, for example, will the firm fund a buy-sell agreement, exit plan or nonqualified deferred compensation package for top managers when cash flow is so tight?
Advisors say the starting point for addressing such challenges is a thorough fact-finding. Among the questions to ask: Where does the firm stand financially and strategically? What are the goals and objectives? How does the business intend to achieve them? And do these intentions align with market realities?
Recommendations notwithstanding, advisors say the financial health of businesses experiencing difficulties should be revisited every three to six months. If the situation is critical, advisor-client meetings should be more frequently scheduled. The upshot of the brainstorming should be a plan to extricate the business from the crisis–backed by a chain of command that inspires confidence.
Often, however, principals stumble when deciding who should run the business. When a parent owner of a sole proprietorship dies, infighting for the top spot can break out among children who inherit the business. Clashes also frequently happen between siblings and key employees, and, as is in the case of a limited liability company, among business partners.
“Everyone must democratically agree to defer to one person,” says Vinnie Conte, president of Conte Financial Planning, Longmont, Colo. “That can be a big deal.”
Management challenges can arise even when written succession plans are in place. R. Clifford Berg Jr., vice president of Centreville, Del.-based Financial House, cites the case of a used car dealership that had contracted with him some years ago. Per a buy-sell agreement, four siblings secured ownership of the dealership, but they couldn’t agree on who would take charge.
The result? “The guy who should have been the chief left the business for another company,” says Berg. “What was left of the business was sold to another used car dealership. The other principals refused to allow the departing exec to be the decision-maker.”
Conversely, the challenge may be to downsize people the business can no longer afford. Berg points to a blueprint manufacturer owner who resisted letting go, or reducing the compensation of, a principal employed at the firm since its founding, though the firm’s loss of market share dictated otherwise.
In other cases, the inability to secure an able and willing third party to run the company can lead to its cessation. Berg cites a sole proprietor of a small communications company who, though near retirement, can’t find a buyer because he occupies a highly competitive field.
“The human factor is not easy to deal with,” says Berg. “I have very difficult discussions with clients, particularly individuals I’ve known for a long time. We have to try to stay objective and focused.”
When the financial situation reaches critical levels, the business may have to tap existing capital assets or credit lines to keep operations running. One source of ready money, say advisors, is the cash value accumulation of life insurance policies used to fund nonqualified retirement plans.