Private businesses are vital to the economy, with more than 25 million operating in the United States. However, an alarming survey finds that more than a third (37%) of these business owners are looking to sell in the next two years – with more than half (55%) citing retirement as a reason for leaving.
Based on the data, private businesses urgently need advisory services to support them. However, the harsh reality is that as of 2021, only 34% reported having a strong, documented and communicated succession plan. This presents a major 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 that starts with recognizing the service gaps that exist for entrepreneurs. Historically, engaging business owners has presented challenges—about 75% a written strategy or financial plan is missing. Providing meaningful advice (and value) to this group requires a thorough understanding of each unique business, yet many advisors struggle to consolidate the right data due to several obstacles.
Private business data is often disorganized and difficult to access comprehensive analysis also time-consuming and costly. Further, many technological advances in the advisory space tend to focus on personal or family financial planning, often neglecting the unique financial complexities faced by business owners. This oversight can lead to a lack of clarity regarding the intersection of personal and business assets, where the latter often receive insufficient attention.
The time to act is now
Continuous large transfer of wealth presents a transformative opportunity for savvy advisors. According to a 2023 STUDY from the Federal Reserve's 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 prior to exit will be favorably positioned to assist them post-exit.
Firms that innovate to drive organic growth and strengthen their centers of influence will have a distinct advantage. Emerging technologies are simplifying the process of capturing and analyzing vital business insights, enabling advisors to create deeper connections with their clients. By using tools that holistically address the financial planning needs of business owners, advisors can ensure that all assets are accounted for during ownership transitions. 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 has worked with a business client for more than five years. This client had a co-owner who maintained a separate consulting relationship, complicating the process. The advisor used advanced data software to create a blueprint of aggregated data, 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 vulnerable to risks such as death, disability, or disagreements with partners—technology can help mitigate these risks.
Through this strategic approach, the advisor also identified opportunities for succession planning, comprehensive retirement strategies and estate planning. This culminated in a strengthened relationship that brought significant benefits to both parties. The advisor provided a financial planning fee for the business, took over the management of the 401(k) plan, implemented an insurance policy for the general manager, created buy-sell funds for the owners and even won over the second owner's personal planning needs in the end.
Sustainable partnerships and organic growth
Given a body of data that shows business owners are left in the lurch when it comes to strategic exit, advisors who aren't already comprehensively gathering data to address their current and future needs should do so a top priority. The opportunity to serve this vital segment of the economy is important and potentially transformative for consulting firms.
By offering comprehensive services, advisors can help ensure a smooth transition for private business owners—positioning themselves as invaluable partners to those succeeding startup directors.
Jason Early is founder and CEO at RISR