Business owners have complex needs, but make great clients

Clients who own a business can be lucrative for advisors. They have more assets and are more likely to pass on intergenerational wealth. However, these clients may have limited liquidity to invest while they’re still operating the business. They also often require more coordination with other financial professionals. They need help structuring their financial affairs, planning cash-flow and maximizing their business’ value when they retire.

But you need to be patient, said Adam McInroy, executive financial consultant with IG Wealth Management in Peterborough, Ont. “It’s a long game, … you’re investing with them to get them to that liquidation event.”

McInroy uses a mix of seminars for business owners and referrals from existing clients to meet prospects. About a quarter of his clients own businesses.

When speaking with entrepreneurs, be eager to learn more about the prospect’s business, said Trevor Greenway, cofounder and CEO of London, Ont.-based tech firm interVal. The software helps business owners find free cash flow in their operations.

You can discuss liquidity, and address concerns about taking out too much cash from the business or tax implications, Greenway said.

“What they’re not looking for is a discussion around better investments,” said Scott Plaskett, CEO and senior financial planner at Ironshield Financial Planning in Toronto. “What they’re looking for is a discussion for how to structure their affairs.” This could include weighing the tax implications of taking a salary compared to a dividend from the company.

Lifestyle liquidity

Owners are often afraid to take money out of their business as they may need it for payroll or to pay suppliers, said Plaskett. Not knowing how much cash they need to run the business may lead some entrepreneurs to stockpile liquidity.

You can help clients find out how much cash they can withdraw from the business without obstructing operational needs, Plaskett added. “They can only retire on liquidity, so we’ve got to find a way to create that liquidity for their lifestyle.”

Greenway has seen cases where small- to medium-sized businesses have $3 million in cash, way over what the firm needed to operate. InterVal’s software benchmarks each client’s firm against industry data to find out how their cash flow looks compared to peer firms. Then, advisors can extract cash to invest as part of the client’s personal financial plan and to fund their living expenses.

Moving surplus cash out of the company over time can be part of tax strategy, and protect the cash from being exposed to lawsuits, McInroy said. Those conversations will likely involve the client’s lawyer and accountant, too.

It takes teamwork

An advisor can’t handle everything themselves, so it’s helpful to have other professionals like accountants and lawyers to turn to, Plaskett said. When a client has an existing professional team, you should reach out to discuss the client’s strategy. It’s important to use the lawyer, accountant or tax specialist for support in those areas of expertise.

The advisor helps the client navigate conversations between the accountant and lawyer, translating the tax terminology into something the business owner can understand, McInroy said. “The benefit to the client is it’s a third set of eyes, an unbiased set of eyes that understands [their affairs] from a planning perspective, [and] the pros and the cons.”

When you frame planning discussions around the client’s business, you may find new sales opportunities, Greenway said. For example, finding out a business’ valuation can help with determining the size of an insurance policy needed to fund a buy-sell agreement.

Most business owners have shareholders’ agreements and buy-sell agreements, he said. But they need to be updated as the value of the company changes over time.

In addition, owners are also employees of their business. They need to have key person insurance in place to mitigate the risk of death or disability, McInroy said. This would be in addition to their personal insurance needs.

Succession and liquidation planning

Ask your client how they plan to exit the business, Plaskett said. The choice between selling a business and passing it to their children requires different conversations.

If an adult child takes over the business, you will need to help the client find ways to take retirement funds out of the company, McInroy said. Clients can pass along the business to their children in the form of a gift. Or they call sell the operating company while retaining the holding company.

But what the child wanted as a teenager could change by the time they graduate university, so it’s important to include the child in client meetings, McInroy added. “At some point, gen two is coming into those conversations, they see what we’ve been able to do, so it’s just easy to carry on because we have that history of knowledge [and] expertise as to why things were done certain ways.”