What Business Owners Really Need from Their Financial Advisors
by David Tolson
Here’s an all-too-common scenario: Your business owner/client and you have a long-standing, solid relationship. Then one day that business owner cashes out and walks away with $8 million and when you, as his trusted financial advisor, bring up placement of those proceeds, your client informs you he’s got another advisor. Ouch.
Here’s how to avoid being replaced at this most critical time.
Ask questions, study tax strategies, and work — continuously — with the business owner before they received the check for the sale.
Talk to your client about her potential exit today and frequently revisit the topic. A few simple questions mandatory to these conversations are:
- Have you thought about your eventual exit from the business?
- What will you do the day after close?
- Do you know what you will need in terms of after tax dollars annually to live the life you want?
- What is the value of your company and how does it align with your expectations or goals?
Even if the exit scenario is 5 to 10 years (or longer) away, this “living conversation,” coupled with doing the work up front, will yield a huge result for your client while securing you a client for life.
Simple asset protection strategies introduced to the business owner today, before a sale, aligns you with her. Utilizing strategies such as “golden handcuffs” for key employees, and estate planning and tax mitigation strategies can be done in advance of a potential sale, and those steps enhance the financial advisor’s relationship with the client. The additional experts needed in this process are good for the financial advisor since it frees the advisor of needing to be an expert in those areas. The advisor need only be visionary and wise enough to identify the issues and start the conversation. It makes the advisor the quarterback in the game.
Before suggesting strategies, begin the process with a frank and honest conversation about long-term goals, both qualitative and quantitative. Not every business owner wants to sell for maximum value to a third party; some owners may want to pass the business to a family member. It’s imperative to clearly understand the objectives of the client and understand that client’s legacy issues.
Get a business valuation completed by an accredited expert so that the true value of the business is accurately identified. Simultaneously, build the needs analysis with sensitivities so that when the valuation is complete, the value of the business can be input into the go-forward financial plan.
A golden handcuffs strategy to retain and motivate top talent will come as a result of detailed discussions with the business owner around her objectives, and after completing the business valuation. Golden handcuffs include non-qualified deferred compensation plans and are powerful tools for keeping key personnel motivated and tied to the business. These steps can lead to the opportunity to manage this plan for the business owner. This is an excellent time to introduce 401k or other benefit plans into the organization and can be a nice win before the liquidity event.
Make sure that the business owner’s will is up-to-date and covers the overall objectives of the family wealth plan. Introducing complicated estate planning tools that mitigate taxes independent of a sale will position you as the trusted advisor for all wealth related issues. For example, most business owners have a reasonable to significant amount of life insurance to protect their family from losing their number one financial resource. Employ an irrevocable life insurance trust (ILIT) as a part of the overall estate planning process. The costs to create an ILIT are negligible, and provide a potentially significant tax benefit as well as a layer of protection from creditors. Quite simply, it is a solid strategy to take care of the business owner’s family. Use it consistently with the business owner’s objectives, and you’ll be in the driver’s seat with that client.
Introducing more intricate estate planning strategies and techniques means that you are taking care of the business owner’s family and protecting them from everyday risks of owning a business. You can be in the driver’s seat, protecting the entire wealth of the family, not just the assets that you manage. Asking the right questions well in advance of an exit will position you as that trusted advisor the business owner relies upon. If you’re not in that position, another financial advisor will be there to pick up the assets and you won’t be in the conversation.