Family business owners need help with succession planning, so financial advisors must embrace that role by stepping in to fill a damaging void, according to experts.
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The sheer potential size of that vacuum is causing registered investment advisory firms and other wealth management companies to invest in services to assist planners in guiding business owners through their exits. For example, Boston-based hybrid RIA firm Integrated Partners launched Integrated Private Wealth last month with the specific focus of counseling private business owners on how to boost their firms’ value, prepare well in advance of any exit transaction and set their course for afterward.
A “conservative” estimate of the portion of the value of private business assets that are part of the looming great wealth transfer from baby boomers to heirs would place it at $10 trillion or more, according to Homer Smith, a private wealth advisor with Gig Harbor, Washington-based Konvergent Wealth Partners. Smith is also the executive director of Integrated’s new wealth unit focused on business owners. “If you just get .1% of that, it’s a pretty meaningful number,” he said. “We think the opportunity is there, just given the size of the market and our commitment to being the leader in that space.”
With an M&A advisory team and estate, tax and legal services, as well as the “mental, emotional, family aspect” that is “often missing” from planning for the business owners’ post-transition wealth, Smith said he sees the possibility of adding as much as $20 billion in assets to the Integrated unit in the next five years through organic and inorganic growth. But those business opportunities represent just one part of the planning needs that he and others already working with private business owners say exist.
READ MORE: How business owners’ exit plans create big openings for advisors
Avoiding the regrets
To name a few of those problems, Smith referred to research suggesting just 30% of business owners who seek a sale are able to complete a transaction within two years; 80% who did find buyers eventually had regrets about their deal; and only 6% said they had no major qualms about their exit M&A.
About three-quarters of business owners who sold their interest in the firm had regrets, according to Exit Planning Institute data cited by Steve Parrish, professor of practice at The American College of Financial Services, an industry training and certification school.
“We hope, we believe that, with planning, this number can be reduced significantly,” Parrish said in a webinar the college held last month. “Now I think we can all agree that this is not a DIY situation. I mean, it’s not do-it-yourself. Business owners are going to need professional help, so that’s why we’re doing what we’re doing.”
And one particular difficulty for business owners revolves around the necessity for reliable valuations of their ventures, which is “a means to do better financial planning” overall, said Jason Early, founder and CEO of business strategy and technology firm RISR. The company is collaborating with the college as part of its “business succession planning certificate” program.
Sometimes, advisors and their clients are using mere rough guesses about the value of the business, rather than getting an understanding of what may be dragging that down or where it fits into their estate and long-term plans, Early said.
“If you’re in the advice business, and you’re giving advice to business owners, you don’t have to be a valuation expert, but you have to have better insight and better clarity into their most important asset,” he said. “For far too long, advisors have been put in a position where they treat the business like every other asset on the balance sheet of the owner.”
READ MORE: Know Your Niche: Advising business owners who want to sell
The American College of Financial Services
Easier said than done
Another common planning dilemma stems from the fact that many busy small business owners are operating with a vague idea of passing their business down to their kids without getting specific plans in place for what is frequently a “very complex process,” said April Caudill, the director of business and advanced solutions with insurance, asset management and wealth management firm Principal Financial Group. During the webinar session with Parrish and Early, she told the story of a 91-year-old business owner whose 71-year-old son had been active at the company for nearly his entire professional career yet still owned just 1% of the venture.
Principal’s annual surveys of business owners have shown that protecting their company is their No. 1 concern. Given that, any number of factors could enter into the succession equation and pose challenges to owners’ legacies.
“There’s a lot of uncertainty about even what they might get out of the business, what their succession plan is,” Caudill said. “And there’s a whole lot more planning involved in even a family business than just saying, ‘Well, the kids will take over.’ That can become very difficult if the parents are having trouble letting go of control and haven’t really prepared for which kids are going to be in the business and which ones aren’t.”
Integrated Partners
The combination of emotions and finance involved in such planning explains why Smith said he agreed 100% with the idea that advisors, and the wider industry, haven’t devoted enough attention to business owners’ eventual exits. Many high net worth clients have built their fortunes through owning businesses, he noted. But their advisors may not have the resources at their firms to grapple with everything involved with the client selling the business, or they haven’t started discussing it with them long enough in advance.
“In general, it’s not about bringing any specific products or solutions,” Smith said. “It’s really overall, from start to finish, getting them through the most important transaction of their lives.”
