The Baby Boomer retirement flood is the gift that keeps giving. Financial advisors are seeing huge growth opportunities to counsel small business clients on exit planning strategies, according to a specialist addressing the Financial Planning Association of New York’s spring forum.
“There is so much opportunity because so many Baby Boomers are coming into retirement. This is a large opportunity for you with your existing clients and prospects with these illiquid assets,” said John Leonetti, the speaker.
A former financial advisor, Leonetti had so much work in helping his small business owner clients come up with an exit strategy that that he sold his own practice and founded a firm that trains advisors on how to help clients exit their businesses. He has also written a book, “Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors.”
He noted that most Baby Boomers have the majority of their wealth tied up in their illiquid businesses. What’s more, most do not have a lot of money saved, and are dependent on the proceeds of the sale of their business to meet their financial goals. This tendency is particularly true now, after a recession, after many business owners have had to put money back into their business. “That begs the question: What are these owners going to do? How are they going to go on and continue to get that income out of the business and diversify and have a better financially secure position?” Leonetti said.
He noted that advisors are always on the hunt for high net worth clients. He suggested they home in on business owners. He cited several statistics showing that the majority of the wealth in the U.S. is held by business owners: they account for 51.6% of households with $1 million to $10 million, 67.3% of the households with $10 million to $50 million and 86% of households with more than $50 million.
He cited more statistics showing how big the audience is, and how much help it needs: the majority of Boomer wealth was held in 12 million privately owned businesses, of which more than 70% were expected to change hands in the next 10-15 years, according to 2006 data from Robert Avery of Cornell University. Most are nowhere near being ready. The average business owner spends 80 hours preparing a business plan, and six hours preparing their exit, according to a 2007 study.
He stressed that advisors do not have to become masters of the art of the deal. Much of what they already do for clients, including helping set goals, is a key part of this work. “This is a fast-growing emerging field. It attracts people who are doing this anyway. Business owners are in great need of this kind of service and the conversation is aligned with the financial planning process,” he said.
One key to remember is that the best exit strategy is the one that meets the owner’s personal and business goals. Often, the goal is not as simple as creating the biggest payday. Leonetti said business owners generally think they want to sell to the highest bidder. Frequently, that will be a financial buyer who will fire employees after the sale to reduce costs. “Then the owner can’t get a foursome for golf on Sunday” because he’s unpopular in the community, Leonetti said. Other times the goal may be keeping partial control of the company to make sure family and long-time employees are treated well. These are considerations advisors can help crystallize for clients, as well as the financial picture.
The big conversation advisors want to have with clients is on the pros and cons, Leonetti said. The owners want to know if they do an internal transfer to a family member, what do they get? The answer is more control. The client gets to keep his job, he can manage this process and he can hold on to his key employees and family that are in the business, Leonetti said.
What are the pros and cons of external transfer? The owner sells control. But the owner gets all the cash at the closing. They have to pay taxes, and the jobs may be lost. “So it comes back to the goals,” Leonetti said. “Since you’re in the business of goal-setting and helping the owners reach their goals, I would submit to you this is the work that you can and should be doing. Financial advisors are having this conversation and educating owners on their options,” he said.
Elizabeth Wine writes for On Wall Street.