The owners of privately held businesses are facing critical decisions regarding their concentration risk, impending exit deals, and family dynamics that are intertwined with their company’s wealth, as per a recent study.
The advice needs of privately held business owners
A survey conducted by Raymond James revealed that at least 88% of business owners are planning to sell a portion of their stakes in the next decade. The study included 540 business owners with ownership stakes in privately held companies ranging from six to 1,000 employees, extending beyond the typical definition of small businesses.
Financial advisors have a significant opportunity to assist business owners in navigating these challenges. Brad Hindman, founder of Apricity Advisors, and Nhaman Pelphrey, head of wealth planning at IFC Advisors, emphasize the importance of guiding owners through the complexities of selling their businesses.
Despite 85% of owners having a succession plan in place, Hindman notes that many plans are incomplete or untested. Selling to family members can pose additional challenges, such as securing financing and potential strained relationships.
IFC Advisors utilizes a “purpose architecture” approach that involves collaborating with the owner’s team of professionals to address all aspects of their life, not just financial considerations.
Key findings from the survey:
- 90% of owners derive at least a quarter of their wealth from the business, with 44% stating the company accounts for half of their wealth.
- 44% of owners with businesses valued over $15 million plan to pass on the business to a family member, while 35% of all owners intend to sell to relatives.
- 20% of owners planning to sell will retire after the transaction, while one-third plan to continue working in the business.
- 85% of owners anticipate the need for additional capital for future growth, considering options like private equity financing, traditional bank loans, personal funds, securities-based credit lines, and personal loans.
Emotions and wealth
Selling a business not only provides capital but also marks a significant personal transition, especially for retiring entrepreneurs who may struggle with a loss of identity. Concentrated wealth in the business can lead to conservative investment choices that may not adequately support them in retirement.
Advisors play a crucial role in helping business owners navigate these emotional and financial challenges. Pelphrey emphasizes that an owner’s emotional attachment to their business can hinder diversification efforts, making it essential for advisors to educate clients on the importance of considering various options.
Building trust with business owners, focusing on their unique needs, and providing comprehensive guidance are essential for long-term success as an advisor in this space.
The study underscores the value that advisors can bring to entrepreneurs by assisting them in making informed decisions that align with their financial goals and personal values.
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