Recent years have seen a regular flow of consumer studies of the financial attitudes and behavior of the affluent and high-net-worth market, and studies also have been released periodically regarding the general small business market. To our knowledge, however, there has yet to be a research study focusing specifically on the planning opportunities in businesses owned by the high net worth.

Given the high failure rates of small businesses, one could argue that businesses owned by the HNW represent the “sweet spot” of the small business market. One might also think that this market is saturated when it comes to financial planning opportunities. However, the following results from the 2005 Phoenix Wealth Survey show that this is far from the truth.

The Phoenix Wealth Survey is now in its sixth year. In this year’s study, we added the additional feature of examining the businesses owned by the 479 business owner respondents in our survey. Here’s what we found regarding business life insurance ownership, business succession plans, business continuation plans and professional business valuations.

Business Life Insurance

Slightly less than a third of these businesses (31%) report that they have any form of individual life insurance for business-related purposes that is paid for out of company funds. Of those owning such coverage, the reasons for having it are shown in Chart 1.

These statistics speak to tremendous opportunities in this market. For example, while “key person” coverage is the most commonly owned business life insurance, it is only in place in 12% (31% x 39%) of businesses owned by the high net worth.

Business Succession Plans

A similar percentage (37%) of HNW business owners report that they currently have a formal written plan in place to transfer their business to a successor upon their retirement or that of a co-owner. Of those plans in place, 48% involve family members, 29% involve key employees, 19% involve selling the business to a third party, and 10% involve liquidation of the business.

Business Continuation Plans

Business continuation plans were more commonly reported to be in place, as 50% reported having a formal plan for transferring their business interests in the event of their death. Of those with a plan in place, it was most frequently arranged through a buy-sell agreement (31%). Other ways included a will (23%), trust agreement (21%), or stock redemption plan (10%). In less than half of the firms having a business continuation plan (40%) was life insurance purchased as a part of the plan. The opportunity here exists in the fact that only 20% of businesses owned by the HNW have a business continuation plan in place that includes life insurance as a part of the plan.

Business Valuations

It only stands to reason that the starting point for any serious business succession and/or continuation planning is an evaluation of the business’s value. However, 68% of the HNW business owners in our study reported that their business has never been valued professionally. Moreover, many of the business valuation plans are outdated as half of those with valuations report that they are over a year old.

Looking Ahead

Finally, significant percentages of HNW business owners without various business plans recognize, on their own, the need for additional planning as shown by the statistics in Chart 2.

Yet there remains a significant difference between the percentage of business owners without adequate plans in place and those who recognize their need for additional business planning. In this difference lies opportunity which only can be seized by your bringing these planning needs to the attention of your business clients.

The second part in this three-part series examining HNW business owners will focus on the personal financial planning issues in this market, with a special focus on how being a business owner affects their views of their personal planning for retirement.

Walter H. Zultowski, Ph.D., is Senior Vice President, Market and Business Development

For The Phoenix Companies, Inc. He can be reached at walter.zultowski@phoenixwm.com.

Chart 1: The Whys

Key Person 39%

Split Dollar/Section 79 32%

Retain Key Employees (e.g., SERP) 27%

Estate Liquidity 27%

Buy-Sell/Stock Redemption Plan 21%

Fund Retirement Benefits 19%

Reimburse Company for Health Benefits 15%

Repay Business Loans/Mortgages 13%

Source: 2005 Phoenix Wealth Survey

Chart 2: The Hows

Some Type of Business Life Insurance 21%

Business Succession Plan 20%

Business Continuation Plan 16%

Key Person Life Insurance 10%

Buy-Sell Plan Involving Life Insurance 8%

Estate Liquidity Plan 8%

Split Dollar/Section 79 Plan 7%

Source: 2005 Phoenix Wealth Survey