Practical analysis for investment professionals
23 January 2012

Helping Clients Monetize Privately Owned Businesses

Starting a private business could put you on the path to untold riches. But it could also land you in a precarious financial position. Consider this statistic from the Family to Family: Laird Norton Tyee Family Business Survey 2007: a staggering 93% of respondents had little or no income diversification. Put another way, they had all their eggs in one basket.

Here are some other stats to ponder: the survey found that nearly 60% of the majority shareholders in family businesses were 55 or older, and nearly 30% were 65 or older. Yet less than 30% of the respondents had succession plans, and less than 40% had a successor in line.

These figures may be a little dated, but the point is just as relevant today: business owners are getting older and want to take some money off the table. At the same time, managing wealth has become more complex and holistic: advisers are now expected to play a much broader role in managing the long-term wealth of client families, including advising on asset protection strategies, life insurance, and the like.

The point? There is a burgeoning opportunity for financial advisers to help clients sell or monetize their privately owned businesses.

Tom Boczar, CEO of Intelligent Edge Advisors, an investment banking and capital markets boutique that collaborates with financial advisers to structure and execute tax-efficient liquidity events for their clients who own businesses, calls these occasions “conversion opportunities.” That is, converting these illiquid assets into cash that can be invested in liquid assets. The problem is that many advisers are not capitalizing on them.

“Most advisers don’t work proactively with their clients who own either businesses or real estate,” he said at a Financial Planning Association (FPA) conference in San Francisco in November. “The norm is to focus on the liquid asset component of the portfolio.”

Boczar calls this the “3-and-30 rule,” in which, for example, “someone has a $3 million liquid portfolio that the adviser is managing, but there is a $30 million business with a $5 million piece of real estate that is virtually being ignored.”

He said advisers need to understand and embrace the role they can play. What is holding them back, however, is a basic lack of education on the range of strategies that are available (it’s not a binary choice between hold and sell) and how best to broach the subject with clients. Strategies include a sale to a strategic or financial buyer, an employee stock ownership plan (ESOP), a personal line of credit against the company shares, and the sale and leaseback of property or real estate in the business, among others. (For more on the strategies, listen to Boczar’s audio podcast “New Strategies and Best Practices to Manage Single-Stock Concentration Risk”.)

“Advisers don’t know what they don’t know, and they feel, ‘Hey if I just don’t understand the intricacies of monetizing or selling a business, or the real estate side, it’s probably better to give no advice than suboptimal advice,’” he said. “This lack of advice is causing this dislocation where you have got all the illiquid assets on one side and all the liquid assets on the other.”

The role of the financial adviser, he said, is to identify client goals and help match the appropriate strategies to the one or more objectives the client has while coordinating with tax counsel and other outside advisers. It is a team effort and a financial adviser can play a vital role in coordinating experts on the client’s behalf. “The financial adviser is working in a wealth planning capacity throughout the entire process,” Boczar added.

The essential role the adviser can play in this process consists of identifying what his client’s core capital requirements are (i.e., how much money he needs to maintain his desired lifestyle for the rest of his life). Once this quantitative benchmark is defined, it is much easier for the client to compare different monetization strategies and determine which, if any, he is financially prepared for. Any excess capital over core capital can then be used to satisfy the client’s aspirational goals (philanthropic goals, leaving a legacy to his family, etc.).

Financial advisers need to look beyond managing only liquid wealth and take “a balance sheet approach” to the business. “A balance sheet has liquid assets and illiquid assets,” said Peter Ruggiero, managing director and head of Global Capital Markets at NAI Global. “Accept the challenge. You may not know it but your clients’ needs are becoming more complex as this economy becomes more complex. You are now more than just an adviser of just liquid wealth. The world is changing, the business is changing.”

There is no time like the present. As Greg Wilder, executive director at J.P. Morgan Private Bank, put it at the conference: “There is going to be a huge trend of private business owners looking to monetize, there is absolutely pent-up demand.”

To learn more about how to raise this topic with your clients and what strategies may be available, join Boczar in Miami in February for the Tax-Efficient Monetization of Concentrated Wealth Workshop that will follow the CFA Institute Wealth Management 2012 Conference. The workshop is designed to give advisers the knowledge they need to create and play a key role in overseeing their clients’ concentrated wealth, whether it’s in the form of a business, real estate, or a concentrated publicly traded stock position.

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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