When your client's business is also their biggest asset
Clients who own a business need an exit strategy -- as their advisor, here are 6 approaches you could present.
You have individual clients who are business owners. You have businesses as clients too – they have owners. Let us assume no one wants to end their life being carried out of their office feet first. They want to spend some years, hopefully many, in their well-earned retirement. Their business is their largest, possibly their only asset. What can they do? How can you help?
1. Initiate a retirement plan through the business. This would be an idea if it’s a mom-and-pop business. The company puts in a plan to provide generous retirement benefits for all employees. There just happen to be two of them, the married owners of the business.
2. Bring in the children. Many private firms are multigenerational businesses. Bring in the next generation with the understanding they will eventually step into leadership rules and the previous generation will ascend to a role such as chairman of the board. The company continues to pay the patriarch who still has an official role.
3. Sell the business. This is not a decision you wake up one morning and execute. You need to get the business into ideal shape, spending years increasing revenue and trimming expenses. You want the business to be showing at its best. You would find a buyer through a business broker. The owner would be expected to remain active for a couple of years to achieve continuity during the transition and retain key clients.
4. Take the business public. It’s not so farfetched. If your business is well run, there may be others who would like to own a piece of the action. If you need practical proof, look at the banking sector in your own market. There are new banks, sometimes with only one branch, that are owned by local shareholders. Over time they add more branches. In many cases, the bank is bought out by a larger bank in an all-stock transaction.
5. Merge the business. Business owners in the local community often know each other quite well. You might find there is a business in the same space that is seeking to expand its market share. Your two businesses merge, with each owner having a proportionate ownership in the combined enterprise. Over time, the owner who wanted to retire gradually steps back and enters retirement. They might sell their share of the business to the remaining owner.
6. Look into Key Person insurance. This is actually a retirement plan for the surviving spouse. Say the business has more than one owner. It is a partnership. When a partner dies, the heirs of the partner’s estate often want cash, not ownership. The key person life insurance policy provides a payment to the business to buy out the deceased partner, transferring the money into their estate. Unfortunately, the partner was actually carried out feet first, but at least their spouse is able to enjoy retirement.
Clients who own a business need an exit strategy to monetize the business. As their financial advisor and an insurance professional, you can help or at least offer advice.
READ MORE: