Is Your Client’s Largest Asset In Your Blind Spot?

Advisors Serve Business Owner Clientele Best By Proactively Advising Clients On Business Sales

Why didn’t you tell me?

Your team has meticulously prepared for a $5 million client to visit your office. You read their files and check the notes, updated their portfolio statistics, straightened and cleaned the conference room, brewed their favorite coffee with two creams, dressed for business and finished a last-minute Google search for their name.

The client enters the office and you exchange pleasantries, then they drop a bombshell on you – with the help of an investment banking firm and an advisor who assisted them through the process, they just sold their $20 million business. 

To add insult to injury, the interloping advisor will manage the proceeds of the sale and the portfolio you established for your client! You remain composed and ask your client, “Why didn’t you tell me about this?” The client responds, “I didn’t know you were in the M&A business.” 

You can turn this unnecessary and unfortunate scenario into a positive one that benefits both you and your client if you consider the following. 

All Small Business Owners Leave

The owner eventually leaves

According to the U.S. Small Business Administration, there are 32.5 million small businesses (with fewer than 500 employees) in the country. Despite the enormity of this number, they all share one common feature – the owner will eventually leave the business. The question is whether it will be on their terms.   

For most business owners, their business represents their most significant asset, and they typically focus all their efforts on issues currently facing the business. However, they dedicate limited time to examining solutions for the next stage of their business – succession – not realizing that procrastination can devastate them.

Advisors play a critical role in helping the owner decide when to sell. The best advice an advisor can give is to sell when the business is performing well. Unfortunately, many business owners wait too long – until a negative event forces their hand. 

The triggering event could be the loss of a key client, higher tax rates, increased interest rates reducing business valuations, an M&A market with a scarcity of potential buyers or any of the following unexpected catalysts:

Didn’t prepare for this?
  • Death of a key employee or customer
  • Disability of the owner
  • Disease, such as a new pandemic
  • Divorce, for which no one plans
  • Disinterest, when the owner loses focus on the business
  • Diversification, or the lack diversification, presents challenges
  • Disadvantage, when competitors gain or the business loses a competitive advantage
  • Disruption, which gives a competitor an advantage in speed, quality or price 
  • Dissolved, when reinvestment in the business lags behind needed levels
  • Dynamics of the family are not conducive

How To Prepare Your Business Owner Clients

Don’t forget about taxes. Favorable capital gains tax treatment is a critical consideration for a business owner contemplating a sale and maximizing the net proceeds of a sale requires comprehensive planning across tax strategy, estate planning, wealth advice and proper structuring of the sale. 

Your client needs a team

M&A process and timing. The typical timeframe for selling a business ranges from three months to one year. In addition to you as advisor, your client needs a team, including a CPA, an attorney and an investment banker. Because of the complexities and time commitment involved, this team is particularly important when business revenues top $10 million. 

Partnering with the right M&A team. The right investment banking firm will have the people, experience and resources to smooth the sale process for both the advisor and business owner client. When selecting investment bankers, advisors and their clients must examine potential bankers with the same diligence they apply to other professional services.

Communication with your clients about your M&A resources. While we wouldn’t recommend an advisor focus exclusively on the business owner marketplace, we do recommend that advisors establish a communications strategy with all business owner clients and prospects and consider the following steps:

Communicate quarterly!
  • Ensure quarterly communication about the latest best practices for business succession strategies
  • Incorporate succession strategies into semi-annual reviews with business owner clients
  • Host an annual webinar or workshop that provides an economic update of your region and the latest trends in the M&A marketplace 
Tony Leonard, Vice President, MidCap Advisors

The business owner marketplace can be a very lucrative niche for advisors to pursue. With the right approach, strategic team and critical understanding of business owner issues, advisors are in an excellent position to generate growth of their fee business through this clientele while ensuring clients receive the best service.

Tony Leonard is a Vice President at M&A consultancy MidCap Advisors.

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