The majority of the baby boomers’ wealth is held in the form of privately owned companies and monetizing them is an opportunity

May 23, 2011 — 1:39 PM UTC by Elizabeth Ostrander

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Advisors these days trip over each other to label their practices as wealth managers but many of them seem to have no stomach for where so much of the wealth resides — in their clients’ businesses.

Indeed, there are trillions of dollars tied up in these assets and baby boomers — with grandchildren, philanthropy and golf courses in mind —are eager to eventually liquidate them.

But due to the complexity of monetizing privately held businesses, the majority of advisors ignore this piece of their clients’ wealth entirely. In doing so, they surrender not only these illiquid assets but risk losing their liquid assets as well.

Hair-raising example

Here’s a hair-raising example: We recently spoke with an advisor who was the last to know that his client’s $50 million business was being sold. The advisor learned of the sale when the client called to inform him that his account was being transferred to a competitor with both investment banking and wealth management capabilities.

By proactively addressing your clients’ need for exit planning, you can better prepare your them for retirement and can better position yourself to capture the proceeds of major liquidity events. If you have yet to ask your clients about their exit plans, here are five reasons why you should consider doing so — today.

1. Baby boomers are aging

Over the next 19 years, 10,000 people will turn 65 every day. The majority of the baby boomers’ wealth is held in the form of privately owned businesses, 70% of which are expected to experience a sale or transfer within the next 10-15 years in order to fund the boomers’ retirement needs (Robert Avery, Cornell University, Feb 2006). These business owners increasingly view their businesses as investments and want to compare the risk/reward trade-off of owning and managing their business to the investment portfolio and lifestyle they could achieve if their business was sold or monetized. With wealth management becoming more holistic, it seems like a natural extension that advisors should be able to facilitate the planning and execution of liquidity events for clients who own businesses.

2. If you don’t, someone else will

Independent advisors face numerous competitors who offer both wealth management and M&A advisory capabilities. If advisors don’t proactively address a client’s need for developing an exit strategy, they risk another firm gaining trusted advisor status with and being selected as wealth manager because the client feels a debt of gratitude to that firm for executing the critical liquidity event. By establishing oneself as the “quarterback” of a client’s liquidity — even orchestrating the team of investment bankers, lawyers, and CPAs— the advisor retains, and enhances, his or her trusted advisor status in the eyes of the client.

3. The market is Improving

As the economy, and more markedly the stock market, have gained strength the profitability of private companies has also improved, and valuations have normalized. M&A activity has increased dramatically. The credit markets have re-opened and interest rates remain near historical lows. Perhaps most importantly, our capital gains tax rate of 15% is the lowest it’s ever been. With looming government deficits, it seems likely that tax rates will soon rise. This could be a terrific window of opportunity for business owners who have been holding out for a higher price tag. One never knows for certain what the future holds but if the current valuation of a client’s business can support that client’s desired retirement lifestyle, he or she might consider striking while the iron is hot.

4. Buyers are Flush with Cash

Private equity firms, pressured to invest money raised in 2006 and 2007 before they must return the uncommitted capital to their investors, are aggressively looking for companies to buy. With the credit markets still not frothy enough to support the blockbuster deals they had become accustomed to, middle-market companies are looking good to PE firms. Strategic buyers (companies operating in the same industry) are also desperate to put their cash to work find sources of top-line growth and realize the synergies and cost-savings that acquisitions provide. Many companies saved or borrowed as much as possible during the financial crisis, fearing that credit markets might close completely and are now left making interest payments on a ton of cash that is earning almost nothing. Also, their stock prices have bounced back smartly giving strategic buyers the opportunity to use both cash and stock as currency to do deals. There is a lot of buying power right now and this creates a significant opportunity for business owners looking to take some or all of their chips off the table.

5. Drive Growth of AUM

For the most part, advisors rely on referrals to grow their books. Rarely do they prospect their own clients. When they do, however, they are often pleasantly surprised. One advisor recently estimated that six of his seventy-five clients were business-owners. Turns out thirty of them are. It may seem shocking that an advisor was not aware that 40% of his clients owned businesses, but this is not uncommon. Advisors typically manage a modest amount of money for clients whose wealth is tied up in a privately owned businesses. They hope that if a client does sell a business, they will be chosen to manage the proceeds.Unfortunately, this is not always the case. Clients often select the firms that execute the sale of their businesses to manage the proceeds. By proactively working with their clients to help plan for and facilitate major liquidity events, however, advisors can better position themselves to capture the proceeds and significantly increase their assets under management.

About the author: Elizabeth Ostrander is Director of Business Development at Intelligent Edge Advisors, an M&A and investment banking boutique that works with financial advisors to plan, structure and execute liquidity events on behalf of their clients who own businesses.


Mentioned in this article:

Intelligent Edge Advisors
Mergers and Acquisition Firm
Top Executive: Thomas Boczar



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