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Understanding (and Landing) Entrepreneurs as Clients

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Among the many challenges of hard-driven entrepreneurs is finding capable advisors in whom they can repose their confidence. 

So says a new report titled “The Life of an Entrepreneur”—produced by BMO Wealth Institute—whose purpose is to help advisors better understand the entrepreneur’s mindset, explaining their need for advice and how advisors can best help them. 

Contrary to popular wisdom, entrepreneurs are not simply risk takers apt to make big gambles; rather they are calculated risk takers who know how to capitalize on their superior knowledge in areas that give them a competitive advantage. Neither are they the individualists they are often branded, but can more correctly be understood as team builders who see value in surrounding themselves with the right people. 

The right people can very much include financial advisors, says the BMO report, produced for clients of BMO Harris Financial Advisors; it cites data that 62% of business owners with investable assets of at least $500,000 use advisors, while only 17% report receiving little input from advisors. And while entrepreneurs seek advice, advisors have long targeted business owners as clients.

BMO cites data that about two-thirds of all non-retired millionaires fall into the self-employed category, adding that more than half of those with more than $3 million in investable assets own a business. The business ownership rate jumps to 78% for individuals with at least $25 million to invest. 

So how is the match between advisor and entrepreneur made? 

BMO says access to the entrepreneur’s inner circle requires two attainable skills: understanding the entrepreneur’s business and unique expertise. 

Understanding the entrepreneur’s business requires at first instance a more general appreciation of the entrepreneurial mentality, which is perhaps the main thrust of the BMO report. This mentality stems from a propensity to keep on trying amid repeated failure. Just half of small and medium-sized businesses celebrate their five-year anniversaries, and only a third make it to double digits. 

Sir James Dyson went through over 5,000 prototypes of his bagless vacuum cleaners before establishing his Dyson company brand, the report notes. 

Another entrepreneurial trait is the reluctance to retire, to “die with their boots on.” 

This characteristic represents a first step toward entry into that inner circle of confidants in that advisors can help with something entrepreneurs need but mostly lack: formal succession plans. Providing the advice entrepreneurs need, and “making it less painful and time-consuming to achieve…desired outcomes” thus paves an advisor’s way to “inner circle” status, BMO relates.

Reinforcing this need is another key concern of entrepreneurs—an imbalance in the work-life equation, something which a formal written succession plan specifying how the entrepreneur’s family will be taken care of in the event of death or disability can address.

Beyond knowing the entrepreneur and his issues, specialized expertise comes into play. These include helping the entrepreneur extract income from the business while minimizing taxes. 

Income and taxes form a unit since each income option bears different tax consequences. For example, a high salary, dividends or bonus could keep the business owner liquid and may even have tax rate advantages, but likely at the expense of tax-deferral opportunities. A further advantage of channeling income to the entrepreneur personally (usually through an S Corporation) is the availability of funds for the entrepreneur’s investment assets.

But such a course may deprive the business of capital, making it more dependent on credit. 

A similar crossroads must be faced regarding whether the entrepreneur is to hold insurance personally or through the business, and whether estate planning strategies such as an irrevocable life insurance trust are worthwhile. 

Advisors catering to entrepreneurs should similarly have expertise in business ownership structures such as the simple limited liability corporation or more complex approaches to minimizing liability. 

A staple of professional financial advice includes tax-advantaged retirement savings programs. Entrepreneurs’ advisors need to be fluent in traditional IRAs, Roth IRAs and 401(k)s. 

An entrepreneur’s advisor also needs to manage any funds left within the corporation with appropriate accommodation towards liquidity and awareness of risk, as well as maintain access to needed credit. 

Aside from these basics, it may well be the many issues swirling around succession that are keeping the entrepreneur awake at night. 

An entrepreneur’s advisor should possess expertise on his business-owner client’s key business-exit options. They include selling to management or key employees. If those potential buyers lack sufficient funding, an Employee Stock Ownership Plan (ESOP) may facilitate such a sale over an extended time period. 

Another approach involves a sale of the business to a third party or business owner already in the entrepreneur’s industry. The BMO report cautions that this approach rarely succeeds because of the paucity of potential buyers; the report cites data that only about 10% of such businesses formally listed with a qualified business broker eventually sold. 

For businesses passing on to heirs, BMO says advisors must ensure that the business possess the liquidity and cash flow to function despite any taxes due on the estate. 

Among business owners who do have a formal written succession plan (about have of those surveyed), the BMO report cites research relating a higher degree of confidence in meeting the entrepreneur’s retirement objectives (96%) compared to their counterparts lacking such a plan (81%).

— Check out 5 Tax Strategies to Pay for College Without Going Broke on ThinkAdvisor.