Helping clients plan for succession

In the rush of day-to-day activity, financial advisers who are fortunate enough to have business owners as clients sometimes forget where their client’s financial hearts are. Hint: not with their investments.

Business owners care most about their businesses, which represent the bulk of their net worth. But this creates a disconnect, because advisers depend on fees charged for managing liquid assets, while most business owner wealth is illiquid.

What’s more, business owners typically view investments as a sideline; to advisers, they’re the main dish.

But for advisers who are willing to ap-proach this divide creatively, opportunities abound.

Advisers who can serve their business owner clients holistically, incorporating illiquid business assets into the financial planning process and helping clients plan for the future of their businesses — especially when that involves business succession planning — stand to reap substantial rewards.

Instead of waiting for a “liquidity event” to drop into their laps, advisers who help business owners plan their future also can help ensure that any future liquidity will come their way.

Let’s look at an example:

Steve, a 58-year-old business owner, has been approached with offers to sell his business. While he would like the immediate gratification of cashing out, an outright sale would jeopardize a succession plan involving his son-in-law, Phil, whom he is training.

It also would mean giving up a business that Steve loves.

Since his adviser focuses only on Steve’s $1 million in liquid assets, Steve doesn’t know where to turn for advice on leaving his business.

A few weeks later, Steve meets Wendy, a competing adviser, at a social gathering. He mentions his problem, and she later calls him and begins a conversation about exit strategies.

“What a relief,” Steve thinks. “Someone finally gets it.”

Wendy’s approach is effective because she understands that Steve’s No. 1 concern is his business, and she offers to help him meet all his goals, providing him with several exit alternatives.

This last point is key: Clients like choices. Steve hadn’t realized that there were many ways a business could be transferred, and thus felt backed into a corner.

Now he is optimistic.

Well-versed in exit strategy planning, Wendy made a point of reviewing Steve’s financial and personal goals. She explained how he could transfer his business over time, retain control, diversify his wealth and ensure that Phil will gradually take over the business.

As you might expect, Wendy won Steve’s business and helped him manage the succession process. She met with his estate-planning attorney to address tax exposure on the federal and state levels, and then arranged for him to meet with two employee stock ownership plan specialists to learn about partial monetization strategies.

Finally, Wendy helped him formulate a gifting program to secure Phil’s position, while establishing an incentive program for additional shares, based on performance. Steve has achieved a best-of-all-worlds exit strategy in which he can continue running his business yet be assured that succession issues have been carefully addressed.

At the same time, Wendy has established a new, strong client relationship. After helping Steve as a business consultant, whom do you think will benefit from the eventual liquefaction of Steve’s illiquid asset?

Wendy could be any adviser. Most think about their own succession planning and the future of their advisory business, but few consider the importance of business succession to those who may be their most valuable clients.

Wendy is an exception. She had the insight and the knowledge to be able to focus on the business owner’s illiquid assets before earning the right to manage his liquid assets.

Advisers who take that approach stand to reap lucrative rewards by tapping into an underappreciated illiquid pool of wealth.

John M. Leonetti is managing director of Pinnacle Equity Solutions Inc., a Boston firm that assists advisers in developing business owner exit strategies. He can be reached at [email protected].