Advising clients about their small businesses is not for the control freak, the timid or the egocentric. But for planners who venture into this terrain, working with entrepreneurs may provide some of the most satisfying experiences - financially and emotionally - of their careers.
"When you graduate from just traditional planning, be prepared," warns Seth Streeter, co-founder of Mission Wealth Management in Santa Barbara, Calif., who likens the work to life coaching. With small business owners, "you are dealing with fertile minds that are going to paint with wild colors."
For our small business cover story, FP spoke with planners around the country who've spent decades developing tools, skills and strategies for dealing with clients whose wealth is tied up with the businesses they are building, inheriting or looking to sell - sometimes, all at once. We have distilled 11 strategies planners can use to thrive in often choppy waters.
Landing a Bigger Fish
For many planners, including Cameron Thornton of Burbank, Calif., learning to serve this challenging clientele brings great rewards. Thornton met Mary DeMartinis about 13 years ago. She and her partner in their Los Angeles-based fresh food company, Okami, had received a $1 million offer to buy their company. If you've ever bought sushi from the refrigerated section at Trader Joe's, Walmart, Sam's Club or Costco, you've likely bought an Okami product. The founders developed a process for extending the shelf life of sushi. After getting the acquisition offer, DeMartinis recalls, "I didn't have a concept of how you sell. We were trying to understand our value."
Thornton brought in a business consultant from the CPA and consulting firm Moss Adams to help value the company. Based on Moss Adams' input and Thornton's own analysis, he told DeMartinis and her partner that, if they invested more time to growing in their niche, they could create much more value. Rather than continuing to do everything themselves, he urged them to hire a sales director and manufacturing director.
The founders took that advice. In December - safely before any potential rise in capital gains taxes - they sold the company to Fuji Food Products in Santa Fe Springs, Calif., a larger competitor. This time, the deal was in the double-digit millions.
"There's so much that we learned" from working with Thornton, DeMartinis says. DeMartinis is now one of the largest clients in Thornton's $120 million AUM wealth management practice. But knowing that he provided her with invaluable counsel that possibly no one else in her life - not family members, a spouse or co-workers - could have offered was the best reward, he says. "I do what I do for more than money. Hugs are an important part of it."
That is, when things go well. Tom Fowler of Fowler Financial Group in Bellevue, Wash., listed some of the innumerable pitfalls of advising small business clients, chief among them incomplete planning. Take the case of two clients who were co-founders of a perfume factory.
"The younger partner was the 'Nose,'" Fowler says, and the older partner was an investor. On the advice of Fowler and a team of advisors, the pair created a buy/sell agreement (see Step 6 below) to compel one of them to buy the other out if one of them died or left the company. The investor also bought a personal life insurance policy on the Nose.
Not long after, the Nose died, triggering a $1 million life insurance payment to the partner. When it came time to hand some of the money over to his late partner's widow, they discovered the Nose had neglected to sign the buy/sell documents. "The older person said, 'He never signed it and you don't get anything,' " Fowler recalls. "One of the land mines in planning is when they don't complete the planning process. You see it all the time and clients are worse off than before they started planning."
Advisors offer these key strategies for working with small business clients:
1. The Confidante
A key role that small business financial advisors play for their clients is that of a listener. Listen, advisors say, and then listen some more. "I want to be your confidante," Edward Wacks, an Ameriprise advisor and CPA in Plantation, Fla., tells his clients. "Sometimes I joke around and say, 'I want to be your consigliere.' "
Wacks took time to listen intently to a client who owns a yacht-servicing company, Mendol USA in Dania Beach, Fla. In doing so, he realized the client needed better bankers. New bankers found by Wacks provided financing for a new warehouse, which helped the company expand its business substantially.
Many business owners don't have people with whom they can share their struggles or their dreams. Nick Niemann, an Omaha, Neb., lawyer with McGrath North and a member of the board of directors of the Nebraska chapter of the FPA, says he can't understand a business owner's needs without listening first. "It would be like a doctor prescribing medicine" without examining the patient, he says. Niemann, who hails from a family that owned a regional grocery store chain, has worked with hundreds of planners and written a book on the subject, The Next Move for Business Owners. He also offers a phased plan for working with business owners through his website, ownersnextmove.com.
As Thornton puts it: "The most important thing you can do is to establish an environment of safety and trust with this business owner that will allow him to be heard. Give them the gift of listening to what their ideal outcome would be."
2. Exit Strategy
Start by asking a business owner to describe her ideal exit strategy. This rule applies whether the company is still a gleam in her eye or is decades old. Many business owners are so caught up in day-to-day demands that they can't readily answer the question. A planner in this case directs their thinking. Fowler asks them, "Do you have a tax-favored plan to get your money out of your business?"
He tells them there are three main exit routes: selling, turning it over to family members or liquidating. Personal preferences, market forces and family dynamics will help determine the right choice. Another potential factor: tax laws in the state where the client ultimately wants to retire.
In several cases, Niemann has helped clients sell their companies but retain the office buildings or warehouses that housed the enterprises. By leasing that real estate back to the company, a founder can create a reliable stream of income for his retirement.
In Santa Barbara, Streeter has helped his client Andy Erickson, founder of nano-scale microscope maker MultiProbe, consider the opportunity costs of not starting several companies simultaneously. "I have more business ideas than one man can possibly pursue," Erickson says. He says Streeter helped him to understand that "it hampers my lifestyle to be tied down to just one business when I have so much else to contribute." To that end, Erickson recently started a new software company and is on the verge of launching a third business. He is taking money out of MultiProbe to fund both ventures.
"I don't think those things would have happened without Seth's input," Erickson says. "He has walked me through those strategic decisions."
3. Team Builder
Entrepreneurs must assemble a strong team of advisors. "In the past, too many advisors have just left this to the client, but the typical business owner is not in a position to assemble the right team," Niemann says. A team may include a CPA, attorneys, a succession and exit planning advisor, insurance brokers, a business evaluator, a mergers-and-acquisition advisor, bankers and, in some cases, an organizational psychologist or a marriage and family therapist. In describing this process to a client, many planners liken the process to constructing a building with the right mix of carpenters, electricians, plumbers and other specialized workers. "I make sure the client understands what the other advisors are saying and I make sure the advisors understand what the client is saying," Fowler says.
"The best advisors aren't about themselves," Streeter adds. "You have to be selfless and truly have a mind-set of serving. Your higher goals are the goals of helping the clients achieve their objectives using their natural talents. If you've done that, then you should be fulfilled."
4. Choose the Quarterback
There's an art to both assembling and playing on a client's team. When a more capable or appropriate expert emerges as the natural leader for a particular client, a good advisor knows when to fall back and become a team member. After gathering advisors together, Thornton says he states his intention to create "a safe environment where everyone can be honest about the value they can bring to the process." His goal is to encourage everyone on the team to speak up if any of them lack particular skills needed to take the client's company to the next level.
The strategy can help a client decide to stop working with a longtime advisor whom she's outgrown. "Some people think they are good communicators when they are relatively poor communicators," he says.
5. The Intermediary
Sometimes a client needs a planner to deal with others on the team directly. In 2008, the business of one of Wacks' clients hit a rough patch and the client worried his bank would pull his line of credit. "I said, 'Let's go in and talk to the banker,' " Wacks recalls. "The banker said, 'I really respect that you came in to discuss the note six months before it's due. That means a lot to us.' " Soon after, the bank renewed the loan. If not, the client told him, he would have gone out of business.
6. Use Buy/Sell Agreements
This critical tool for companies with co-founders is a binding agreement stipulating that, if one party leaves the business, the other must sell to the other party, and the other party must buy it at a price and on terms that have been predetermined. Without a fully executed agreement in place, the death or departure of one partner can spell disaster for the late partner's family or for the surviving partner.
7. Cover the Bases With Insurance
Life and disability insurance play crucial roles in the continuation of small businesses. If a founder dies with most of his net worth wrapped up in his company, estate taxes can gobble up half the value of a company and force its sale. "The IRS only wants one thing and that is cash and, so, if a business owner has not planned for this, he basically has a forced sale" upon his death, says Mark Weber, a business succession consultant with the SilverStone Group in Omaha, Neb. This is where a shortsighted financial advisor could help destroy a client's business.
Fowler worked with a client who ran his family's casket manufacturing company. The client's broker told him, "You are crazy to buy life insurance. I can make you a whole lot more money in these investments." Fowler prevailed. Four months after the life insurance policy was issued, the business owner was diagnosed with a terminal brain tumor. Later, the company's CFO told Fowler that, without the insurance payout, the company would have gone out of business.
8. Treat the Kids Fairly, But Not Equally
Even in a large family, often just one adult is capable of taking over the family business. In some cases, planners have helped a single family member buy out the founding parent using a note to be repaid with cash flow from the company. In essence, that person takes his or her inheritance before his siblings. Sometimes, feuding families will do better to sell or liquidate a business and distribute profits rather than try to execute a succession plan that may be doomed to failure.
9. Be Prepared to Be Ignored
Karl Frank, owner of A&I Financial Services in Englewood, Colo., says business owner clients are unpredictable.
"You've got to be flexible. You're going to put a plan into cement, but a client will call you on Monday and say, 'I decided to buy that vacation home in Hawaii.' You either have to say, 'No, you're not, and here's why,' or 'I'm not surprised that you did that.' They are going to make mistakes on you."
10. Expect Referrals
Planners who develop the skill sets to work with business-owner clients will receive referrals from other planners who need help.
11. Be Comfortable With Messiness
"I'm not afraid to ask questions," Thornton says, "and I'm not afraid to listen until there's a level of clarity so that something that initially appeared to be messy is crystal clear."
Ann Marsh is a senior editor and the West Coast bureau chief of Financial Planning.