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The Financial Advisor as Life Coach

How to add value to the top three stages of a business owners’ life cycle

By Kevin Meehan

Many younger advisors today start their books looking for so-called “HENRY” clients (“High Earners, Not Rich Yet”) in the hopes that building relationships with successful younger professionals will eventually yield sizable assets. For clients in professions like law or medicine that have a relatively stable upward income curve, this formula works in a straightforward way.

For the most lucrative potential long-term relationships, though—those with new business owners—younger advisors must keep in mind that they themselves have a role to play in the client’s success or failure. For business owners, there is no such thing as a “career track,” only a series of escalating and evolving challenges that continually place different demands on their personal financial lives. Unless they can successfully adapt, problems can quickly crop up in their own financial planning, and potentially carry over to impact their businesses.

Advisors who can help entrepreneurial investors make the right adjustments to their personal finances as they transition from one stage of a business’ life cycle to the next may very well find themselves with a prosperous and loyal book of long-term clients.

However, if you have never built a company yourself, how can you coach someone through these crucial financial transitions? Following are the three areas of a business owner’s life cycle where an advisor can add considerable value:

1. Start-Up Phase: Many new business owners fail to anticipate that, as soon as initial financing questions regarding the business are resolved, crucial personal financial planning questions enter the picture. I’m referring specifically to the issue of equity ownership.

Faced with the typical startup cash shortage but still needing to attract and retain talented employees, many entrepreneurs turn to stock options (or outright equity grants) as an easy and convenient compensation solution. Business owners in this position need to remember, however, that apportioning equity is not simply a matter of control. It is a matter of financial planning that will impact them and their heirs for years and possibly for generations.

Entrepreneurs can navigate this tricky balancing act by first focusing on the value of the equity itself. Is there a strong likelihood that a key employee or group of employees will be able to offset the financial consequences of diluting the founder’s stake by expanding the overall value of the company? If so, a more generous approach to allocating stock may be in order.

Second, business owners should be honest with themselves about the benefits of broad employee equity ownership. It may be possible to strengthen morale and employees’ sense of common purpose without diluting the founder’s control of an asset that—if the business succeeds—could be his or her most lasting legacy.

2. Expansion Phase: Once a business moves from the roller coaster ride of the startup phase to generating more predictable and sustainable cash flow, a new set of personal planning considerations emerges. At this point, the company will likely begin to hire more established professionals with higher expectations for stable benefits. The company founder will likely want to take advantage of opportunities to shift some of his or her planning needs to the business, as well, via company healthcare plans and retirement benefits. 

The important thing for entrepreneurs to remember at this point is that there is no need to jump into all the myriad benefits programs available right away. The best approach may be to roll out a more affordable suite of offerings to employees first, then phase in more ambitious programs once it becomes clear the company can support them over the long term.

Group disability and life insurance plans, for example, can provide solid value to both the business owner and his or her employees at a reasonable cost. At the same time, enhanced payroll deduction options to fund vehicles such as 529 educational savings plans can enable both the business owner and his or her employees to save for important upcoming expenses on a straightforward basis.

3. Maturity Phase: Business owners need to be constantly focused on the future. For the owner of a mature company, this means thinking realistically about retirement expenses and planning an exit strategy. Entrepreneurs may want to take advantage of the relative stability of this stage in their company’s life cycle to examine incentive programs that can help them meet their own projected retirement expenses (including costs such as entertainment and auto payments that may currently be handled through the business) while also keeping the next generation of leaders in place within the company. This may mean taking a look at vehicles such as defined benefit pension plans and deferred compensation programs.

The maturity phase is also the ideal time to obtain a professional valuation of the business if a sale of the company is a likely potential exit strategy. As entrepreneurs begin to think about exiting, an initial valuation that factors in the tax impact of a sale can provide a crucial reality check for their plans for the future.

Successful entrepreneurs are adept at spotting shifts in the business environment and adapting to them for the benefit of their businesses. Unfortunately, many of these same leaders have difficulty identifying changes in their own personal financial planning needs that may arise as their businesses move from one stage of growth to the next. By helping business owners identify and navigate the important personal planning challenges that are likely to arise as their companies evolve, however, younger financial advisors can put themselves and their clients where an entrepreneur always wants to be: one step ahead of the trend.

Kevin Meehan is Regional President – Chicago of Wealth Enhancement Group, a Greater Minneapolis-based independent wealth management firm with approximately $6.3 billion in assets.

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