Helping business-owner clients through times of turbulence

High-net-worth entrepreneurs make ideal clients, though they’ll need firm guidance in interesting times

Helping business-owner clients through times of turbulence

For advisors looking to build a book with high-net-worth clients, small-business owners are a good target market. Not only do they typically possess high-value assets in their businesses, but they also typically need highly specialized advice around tax strategies, succession planning, and other areas.

One particularly important milestone, before and during which advice is doubtlessly needed, is when it’s time to sell their business — which, for more than seven tenths of business owners, is expected within the next 10 years. That represents more than $1.5 trillion in business assets being unlocked for retirement.

But when the markets are shaking, small-business clients will need more firm guidance than they typically receive. Fear and anxiety from external factors rarely help, and they can lead to devastatingly misguided decisions leading up to or in the wake of a business sale.

With that said, there are a few practical points that advisors to such clients must cover. “[W]hether a business is worth $5 million or $50 million, it will likely make up the lion’s share of the owner’s net worth,” wrote Steven Dudash, president of Chicago-based IHT Wealth Management, in a column on “The temptation over the last decade or so, when markets enjoyed near-uninterrupted gains, was to take the entire windfall and convert it into stocks.”

The better approach, Dudash counselled, would be to follow the tried-and-tested philosophy of dollar-cost averaging. While clients have found it hard to fight the temptation from double-digit annual returns, advisors must act in their best interests by advising a conservative approach.

“Clients may not benefit from the highest of the highs, but they won’t get punished by the lowest of the lows, either,” Dudash offered as a reminder. “Take the guesswork and emotion out of the market.”

Clients may also fail to properly set the stage for their plans to sell. They may have a good idea of when they want it to happen based on their age or certain revenue/profit milestones. But come that time, many find themselves unready, particularly if they’re caught wrong-footed and find a good portion of their business’s value eroded away by market turbulence.

The key to the better outcome that could have been, Dudash said, is preparation with contingencies. “[Clients’] fortunes could take a turn based on a declining economy or a micro-event cutting into their revenues,” he said. “Always have an exit strategy, because you’ll never know when you’ll need to use it.”

Finally, clients may underestimate how close to the financial brink they are. A client with a business valued in the tens of millions may feel like they’ve got a cushy nest egg. Many of those who have grown used to a high-net-worth lifestyle may not appreciate the risk from car payments, mortgages, club memberships, their children’s educational expenses, and so on — until a backdrop of market volatility puts that risk in sharp relief.

“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,” he said, noting that wealth typically gets handed down 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.”


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