Do your business-owner clients need to improve their resilience?

Meridian VP offers three simple tips for advisors to help them do that

Do your business-owner clients need to improve their resilience?

Do you have business clients who need to improve their business’s resilience now that they’ve weathered the pandemic? Are they looking to shore up their protection for the next crisis – or even sell before that?

If so, Jason Teal, a Meridian Credit Union Vice President of Business Banking who deals with small to corporate-sized businesses, offered Wealth Professional three tips and a tool for advisors to assist those clients.

The first is to ensure that your clients get a line of credit – even if they don’t need one right now.

Teal said many of his business-owning clients sink everything they can back into their businesses, so they need a back-up plan – particularly now that government is withdrawing financial support it previously offered.

“They really need to have that rainy day – not necessarily fund – but backup plan, even if they don’t think they need it,” he said, “because we’ve just had not only a rainy day, but a deluge for awhile.”

While the owners could reserve cash, Teal said a line of credit is the best insurance.

“Even if it costs $50 a month, or whatever, to have that access when you need it, it’s a small price,” he said. “Those who had it in March 2020 fared much better than those who didn’t.”

The second tip is to ensure your business clients have the right advisors or advisory board to provide them with the best advice they can get. This could be for planning and forecasting, inventory management, or billing and collections.

“This is one area where you can make your business more resilient by having a clearer understanding of your opportunities and your downside,” said Teal. The advisors could be an informal management coach, accountant, two or three other business owners, an advisory group or informal board of directors, or even the financial advisor. What’s key is that the owner receives some independent advice about different aspects of the business.   

”It can be scaled down and still provide that independent advice and sounding board,” he added. “Just because you start a restaurant doesn’t necessarily mean you’re good at the financial end of all the pieces to this management culture. So, something like this would give them a bit of a leg up in the areas they may be weaker in.”

Teal said it’s important to formalize a process, so the business owner has some accountability. That may mean “forcing some discipline” by having the owner prepare a quarterly update to have the discussion so they aren’t just doing informal, random conversations. Having that discipline requires the owners to examine their books and look at their planning to see what more they should be focusing on or eliminating.   

Finally, advisors should suggest that their small business owners get their books in order, especially if they want to sell their business. Teal said many owners focus on avoiding taxes, but they should have a multi-year plan years before they try to sell their businesses.

“An accountant is key to having good financial reporting,” said Teal, “but having a plan will allow a person to get a better dollar for their business. It will also allow a purchaser to get financing to buy your business if you have good records, a good reporting system, and profitability. That is something an advisor could really provide value-add to ensure that the business owners have that mindset and are getting prepared at least three to five years in advance.

“We see many cases where there is a nice business, but the reporting is subpar and not accurate. So, our ability to lend on that decreases because we don’t have confidence in the numbers,” he added. “When businesses clean up their books and make sure they’re getting everything ready, that allows the buyer to get better financing, which allows them to potentially pay more.

“I’ll tell you now that if our client is looking to purchase and the seller doesn’t have good books, our purchasers either aren’t going to be able to buy it because the bank or credit union won’t lend them enough money, or they’ll have to buy at a discounted rate because they can’t get financing. Either way, it’s going to play out that they’re not going to sell as quickly as if the owner had cleaned up their books and had a multi-year plan for their business.”

Teal said Meridian has a Financial Resilience Score that advisors, or their clients, can check to provide a quick snapshot of the business. Advisors could even test it with a business client in mind as it provides some practical advice, especially for smaller businesses, which may help them consider other ways to build their business resilience.

“There’ve been two financial crises in just the last 15 years. It’s impossible to plan for all the unforeseen risks,” said Teal, noting those can include global events, such as the pandemic, but also industry and local events that can impact revenue and even force a business shutdown. “So, these are three parts to building that important resilience.”