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?”
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.