Over the years, small business owners have emerged as ideal clients for independent advisory practices. Not only do entrepreneurial synergies exist that tend to make such individuals easier to work with, but many also occupy the stratified air of the high-net-worth segment.
While serving this niche can be rewarding, even exhilarating in some instances, it’s also hard work, requiring specialized expertise that doesn’t often come into play for other clients. This is perhaps best underscored when it comes time for the client to sell their business.
For an overwhelming majority of small business owners, the entity is by far their most valuable asset, used to fund most, if not all, of their retirement. This can create complications even during the best of times. But what about when markets are rumbling, like they have recently in the wake of renewed concerns about a prolonged trade spat with China?
Advisors must be able to offer practical support to high-net-worth business owners who confront a volatile environment just as they are about to make a deal. Here are some top considerations:
Utilize dollar-cost averaging. As suggested above, whether a business is worth $5 million or $50 million, it will likely make up the lion's share of the owner’s net worth. The temptation over the past decade or so, when markets enjoyed near-uninterrupted gains, was to take the entire windfall and convert it into stocks.
Though that approach flies in the face of dollar-cost averaging, a fundamental financial planning precept, many advisors did it anyway. With double-digit annual returns having been the norm in the wake of the financial crisis, they hesitated to push back against clients who wanted to be more aggressive, wary of getting second-guessed down the road about perceived unrealized gains.
Dollar-cost averaging exists for a reason: Clients may not benefit from the highest of the highs, but they won’t get punished by the lowest of the lows, either. Take the guesswork and emotion out of the market. Don’t plow a lump sum into the markets and instead make investments gradually, which will shield clients from risk.
Clients should always be ready to sell, even if they have no plans to do so. Business owners typically have a pretty good idea of when they want to sell, with the timeline sometimes based on their age or reaching certain revenue/profit milestones. Whether they are prepared to sell their business when that time comes is another story altogether.
Advisors, therefore, should encourage such clients to prepare for their exit years in advance to guard against the possibility that market risk could erode the value of their business. We’re currently beginning to see this in financial services.
For years, advisors have been hesitant to sell their books of businesses, thanks to the upward trajectory of the markets. Their practices were escalating in value and, for some with recurring fee-based revenue, life was too good to quit. However, as the investing environment started to face hurdles late last year, their valuations took a hit, and the outlook could have changed.
The problem, though, is that many have not prepped for exit, meaning the realities of the market at any given time could wield outsize influence over a sale process. The same principle applies to countless industries across the country, whose fortunes could take a turn based on a declining economy or a micro-event cutting into their revenues (e.g., a microbrewery that has seen their aluminum costs rise as a result of tariffs). Always have an exit strategy, because you’ll never know when you’ll need to use it.
Communicate how much a client will need to maintain their current lifestyle. Let’s say a client comes to you and says they are about to sell their business for $25 million. On the surface, that sounds like a lot of money—and in most instances, it is. Yet, many business owners who have adjusted to a high-net-worth lifestyle will be surprised that an amount like that won’t take them as far as they think.
They have car payments, a couple of mortgages, a country club membership as well as food, entertainment and leisure costs, to say nothing of a child’s college and their own medical expenses. Additionally, they have service providers, including financial advisors, lawyers and accountants. These obligations accumulate quickly and could be exacerbated by the fallout of a volatile market.
Make sure business owner clients know what it will take for them to preserve their current lifestyle, not just now but for the next 30 to 50 years (keep in mind, this wealth, in some instances, is intended to last for generations). If there’s anything we know about the high-net-worth segment, it’s that they are loath to make do with less. Many would prefer to work a few extra years.
Volatility is the norm, not the exception. While concerns about trade are driving the most recent ups and downs, an entirely different set of considerations could spark investor anxiety in the future—and complicate the exit of a small business owner in the high-net-worth segment. Be prepared to help your clients when that happens.
Steven Dudash is the president of IHT Wealth Management, a Chicago-based firm.