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What Small-Business Owners Need Most From Advisors

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One of the most valuable services advisors can provide small business owners is to help them determine what their business is worth. Their business is more than their job; it’s their livelihood.

“For many business owners, a significant part of their assets, of their net worth — sometimes 70%, 80%, 90% of their net worth — is tied up in their business,” Dan Prisciotta, a planner with Lincoln Financial Advisors, told ThinkAdvisor. “Their business is the source of their income, salary, bonuses. It’s the source of all of their benefits, retirement, health insurance. If they don’t know what their business is worth, how can they plan for it? How can they plan to protect it? How can they grow it? Ultimately, how can they plan to transfer it?”

Planning for a transfer is another important aspect of serving small-business clients.

“Some business owners tend to think they’re going to die with their boots on,” Dianna Parker, director of planning for the Southern Regional Planning Group of Sagemark Consulting, added in the interview, “but there are a lot of business owners who don’t plan to work till they drop. They would like to find the best method of exiting the business.”

If that includes a sale to a third party, a lot needs to be done before the owner starts shopping for buyers. “Have you maximized what’s on the balance sheet? Is [the business] prettied up? Does it look its best? You want it to be that way before you hit that market,” Parker said.

Prisciotta said, “I ask business owners, ‘How many owners are going to exit from their businesses?’ And of course it’s a trick question; 100% of business owners ultimately are going to exit from their business, either vertically or horizontally. It’s either going to be on their terms, or it’s going to be on terms dictated by someone else. It’s a real challenge for them to put together a plan in writing. I saw a survey recently that found 75% of business owners don’t have a written succession or exit plan.”

Prisciotta referred to the number of boomers turning 65 every day. “Retirement is a huge issue. Business owners don’t know what their business is worth. They don’t know how to convert that into liquid dollars they can live on.”

They don’t know what their business is worth and they don’t know what they need in retirement, Prisciotta said.

When they sell their business is also important. The last few years have seen an “extremely hot market for selling businesses,” Prisciotta said. “Companies are getting extraordinarily high prices. We’re living in a world of low interest rates, so it’s easy for somebody to acquire a business if they need to borrow money. We’re still in a world of relatively low capital gains rates. [Some] companies are sitting on trillions of dollars of cash on their balance sheet, but they’re struggling to grow organically, so they’re looking to grow through acquisition and they’re looking to acquire small businesses, middle-market type businesses.”

The problem for business owners looking to sell, though, is “How long will this bull market in the closely held business [industry] continue?” Prisciotta suggested that business owner clients who know they don’t want to work until they can work no more should do a business valuation now to see if it’s a good time for them to consider selling their company. “If I miss this window of opportunity in terms of market timing, it might be eight or 10 years before I can get these kinds of prices.”

Small-business values were cut in half during the recession, Prisciotta pointed out. “By the time I take taxes out of it, how am I going to invest the proceeds and replace the salary and the benefits that my business had previously provided me?”

Other Challenges

Whether they’re going to work until the undertaker takes them away or stop some time before that, small-business owners face multiple challenges in their companies. One of the biggest ones, according to Parker, is tax planning.

“Every business owner I’ve ever worked with, they are all interested in any way they can save taxes,” she said. “They know that the tax bite is a significant one, both for their business and for them personally, for their family. Most business owners that we work with have businesses with significant values, so they may have a taxable estate.”

In addition to planning for income and capital gains taxes, Parker said advisors should also look at gift or estate taxes. “Looking for every opportunity for tax reduction that exists for a business owner is usually pretty important to them. Every business owner’s situation is different; every method of compensation, every amount of compensation, so it’s a highly customized approach when you’re looking at ways to help them with tax reduction strategies.”

Insurance planning — not just property or cybersecurity, but life insurance and death and disability insurance as well — is another important issue for business owners, though they might be more reluctant to talk about it.

Parker and Prisciotta stressed the importance of securing coverage for owners and key managers, and also reviewing existing policies to make sure they’re adequate.

“Their business is such an integral part of their net worth,” Prisciotta said, which can leave owners wondering, “’What happens if I die or become disabled? Does the income stop for my family? What happens to my employees, to my customers?’”

The death or disability of a shareholder or key member of personnel can cause “huge problems” for a small business. “You hear about it all the time when there’s a death of an owner and there’s a fire sale and all their equipment’s being sold at auction. Or you hear about a business owner who died and now the business is being sold to pay their taxes such as estate taxes,” Prisciotta said.

“Things change dramatically in a business owner’s situation over time,” Parker added, so it’s important to review “whatever it is that they have and [compare] it to what their current objectives are to see if the insurance they have in place is still consistent with what they’re trying to accomplish.”

Another unpleasant conversation includes what happens to a business when there are multiple owners and something happens to one of them. That can be especially problematic if they don’t have a shareholder agreement in place, a situation Prisciotta said is pretty common.

“We find surprisingly that most business owners don’t have a shareholders agreement or what we call a buy-sell agreement,” he said. “In other words, what happens if a voluntary or involuntary event occurs? What happens if I die, become disabled? What if I get divorced? What if wake up one morning and say, ‘I don’t want to do this anymore. I quit.’ What if I’m terminated, I’m arrested, I file for bankruptcy? Many business owners do not have an agreement to address all of these contingencies.”

Without a plan, he said, owners could be facing “litigation or liquidation or, at a minimum, [an] extremely expensive, drawn-out type of scenario.”

“Let’s face it, this is not cocktail banter,” he said. “It’s a lot more interesting to talk about a stock that you purchased that doubled in value. Nobody wants to talk about their buy-sell agreement so they tend to avoid the topic, and as a result, they often fall short.”

He suggests advisors sit down with their clients, reluctant though they may be to create a plan for what to do after their partner is arrested or hit by a truck, and try to craft a plan that addresses these issues. Then, an attorney should be brought in to create a binding agreement, he said.

Drawbacks for Advisors

Some advisors are turned off from advising small-business clients because their needs are so complex, Prisciotta said. “A lot of advisors don’t have the training, they don’t have the support, perhaps they don’t have the technical background to venture into these waters. They feel very safe talking about things like investments or other financial products, which is fine, but the business owner market demands a higher level of support and training.”

There may also be some fear that those clients aren’t as lucrative, but Prisciotta said, “It’s very short-sighted for an advisor to think the business owner market is not a lucrative market. Speaking from experience, when I work with a business owner we’re able to earn a fee for our planning and consulting work because of all the complexities, and the business owners, once they get it, they’re more than happy to pay our fee for advice.”

Those clients also have a “tremendous need” for products like insurance and retirement planning.

Parker noted, “Most advisors are far more educated and capable and competent in investment planning and perhaps retirement planning, as opposed to business planning and estate planning. To some extent, it’s a lack of understanding about what the opportunities are in the business-owner space.”

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