Private businesses are vital to the economy, with more than 25 million operating in the United States. However, an alarming survey reveals that more than a third (37%) of these business owners are looking to sell in the next couple of years—with more than half (55%) citing retirement as the reason for exiting.
Given the data, private businesses urgently need advisory services to support them. However, the harsh reality is that as of 2021, just 34% reported having a solid, documented and communicated succession plan. This presents a prime opportunity for forward-thinking advisors.
An Empathetic Approach
Advisors who choose to engage with this segment of business owners must adopt a strategic and empathetic approach. Building trust is essential, and this begins with recognizing the service gaps that exist for entrepreneurs. Historically, engaging business owners has posed challenges—approximately 75% lack a written financial strategy or plan. Providing meaningful advice (and value) for this cohort necessitates a thorough understanding of each unique business, yet many advisors struggle to consolidate the proper data due to several barriers.
Private business data is frequently disorganized and difficult to access, making comprehensive analysis both time-consuming and expensive. Further, many technological advancements in the advisory space tend to focus on personal or family financial planning, often neglecting the unique financial intricacies that business owners face. This oversight can lead to a lack of clarity regarding the intersection of personal and business assets, with the latter often receiving insufficient attention.
The Time to Act Is Now
The ongoing great wealth transfer presents a transformative opportunity for savvy advisors. According to a 2023 study by the Federal Reserve Survey of Consumer Finances, the average net worth of private business owners ranges from $1.6 million to $17 million. Advisors who cultivate relationships with this subset of business owners pre-exit will be favorably positioned to assist them post-exit.
Firms that innovate to foster organic growth and strengthen their centers of influence will have a distinct advantage. Emerging technologies are streamlining the process of capturing and analyzing vital business insights, enabling advisors to forge deeper connections with their clients. By employing tools that holistically address business owners’ financial planning needs, advisors can ensure that all assets are accounted for during the transition of ownership. Access to tailored data empowers advisors to engage in meaningful dialogues with business owners, positioning themselves as trusted partners when it comes to holistic planning. This collaborative approach benefits both the entrepreneur and the advisor.
Real World Impact
To illustrate the potential for successful engagement with business owners, consider the experience of an advisor who worked with a business client for more than five years. This client had a co-owner who maintained a separate advisory relationship, complicating the process. The advisor utilized advanced data software to create an aggregated data plan, providing a transparent view of the company’s current and potential value. This analysis included a risk assessment that highlighted vulnerabilities such as dependency on key personnel, financial practice risks and vendor diversity issues. For many entrepreneurs, significant business value remains unprotected against risks like death, disability or disputes with partners—technology can help to mitigate these risks.
Through this strategic approach, the advisor also identified opportunities for succession planning, broad retirement strategies and estate planning. This culminated in a strengthened relationship that yielded substantial benefits for both parties. The advisor secured a financial planning fee for the business, took over the management of the 401(k) plan, implemented an insurance policy for the general manager, established buy-sell funding for the owners and even won over the second owner’s personal planning needs in the end.
Enduring Partnerships and Organic Growth
Given a raft of data indicating that business owners are left floundering when it comes to a strategic exit, advisors who are not already comprehensively aggregating data to address their current and future needs should make it a top priority. The opportunity to serve this vital segment of the economy is significant, and potentially transformative for advisory firms.
By providing holistic services, advisors can help to ensure a smooth transition for private business owners—thus positioning themselves as invaluable partners for those who succeed the original principals.
Jason Early is founder and CEO at RISR
