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Practice Management > Building Your Business

Invest in exit planning

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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 percent 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.

Business owners are the single largest affinity group for the financial advisory profession, often eclipsing 50 percent of an advisor’s client and prospect base. Your business owner clients likely have 80 percent 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 about their business exit or business sale. 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. Below is a graphical comparison between a business owner and another high net worth individual.

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. 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.

There are many complex issues involved in a business transition or a business sale. Poor decisions at this critical time can result in swings of hundreds of thousands or even millions of dollars. If you can take away one thing from this, it would be to 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:

  • An attorney to create necessary documents, such as wills, trusts, family LLC’s, and corporate structure;
  • An estate planner to work with the financial advisor and attorney to create the properly documented estate roadmap;
  • A CPA or tax advisor to review corporate structure, analyze after-tax proceeds, compare various transaction structures, and create tax deferral and tax avoidance strategies; and
  • An investment banker or merger and acquisition advisor to analyze the business, develop value creation strategies, position the company for sale, and create a soft auction of multiple buyers to maximize selling price and terms.

Inserting yourself into this role is not only the right thing to do and a great help to your clients, but it is just plain smart business. Remember how you make your living. It normally involves a fee as a percentage of assets under management. Those assets do not include the lion’s share of your business owner client’s net worth, his business. If his investment assets are $2 million before the business sale, they could increase to $10 million or more after the sale. You have no guarantees that he will just turn over these assets to you to manage. By providing the planning discipline, your Rolodex of professional advisors, and your quarterbacking efforts, you help your client dramatically improve their financial outcome and increase your chances of managing their newly monetized wealth.

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.

Dave Kauppi is president of MidMarket Capital, providing investment banking and merger and acquisition advisory services. For more information about exit planning and selling a business, visit Contact Dave at [email protected].


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