(The following article is the first in a series, based on a new survey of 603 small business owners with total personal net worth of more than $7 billion, which examines their financial lives, their use of financial products and services and their relationship with their financial advisors.)
Small businesses are often credited with being the engine that drives America, not only as a wellspring of innovative ideas but also as an important source of job creation and GDP growth. Further, according to our recently completed study of small business owners, their individual wealth is anything but pint-sized: The 603 respondents in our new survey had an average net worth of $11.7 million.
In addition to being wealthy, small business owners have a checklist of special financial needs that sets them apart, ranging from business succession plans to more esoteric offerings such as key-person insurance and buy/sell arrangements. Just as importantly from the financial advisor's perspective, our research showed that many of these needs are unaddressed: Estate plans are sorely outdated, succession plans are unfinished and asset protection plans are incomplete. Given the assets in play and the financial issues unresolved, this is clearly a segment that bears scrutiny.
Defining Small Businesses
According to the U.S. Small Business Administration, a small business is broadly defined as one with no more than 500 employees for most manufacturing and mining industries and with no more than $6 million in annual receipts in nonmanufacturing industries (though there are many caveats and exceptions). The SBA reports that there were 22.9 million such businesses at last official count (in 2002). Those businesses account for 40.0% of the nation's private sales and 99.7% of all employers. They employ 50.1% of the private workforce and produce approximately 75% of new jobs that are created. They are, in sum, a powerful economic force.
Family Versus Corporate Businesses
To learn more about the people who own these businesses, we recently conducted a survey that asked 603 of America's small business owners about their primary business and financial concerns. Other issues explored in the survey included the financial products they use-and ones they want to use down the road-how they found their financial advisor and where, as well as their interest in specific financial products such as planned gifts, estate plans, succession plans, asset protection plans and key man insurance.
In our study, there were two kinds of small businesses: family-owned small businesses, which accounted for 387 of the respondents in our study, and corporate small businesses, which accounted for the other 216.
A family business is defined as one:
That has one or more family members employed in senior positions;
Where multiple generations are (or have been) involved in the business;
Where the family has majority ownership; and
Where the family wants to maintain majority ownership.
A corporate business, in contrast, is one:
Where leadership is not drawn from the same family;
Where multiple generations are not involved in the business;
Where the family does not have majority ownership; and
Where there is no succession plan.
Our Research
Now let's look at some of the demographics of the small business owners in our study. First, as you can see in Exhibit 1, all of the businesses-primarily in manufacturing, services, retail, and wholesale-fell well within the SBA's definition, averaging 116.7 employees and almost $32 million in sales annually (Exhibit 2).
When it came to leadership, about two-thirds of the CEOs and presidents were men (Exhibit 3). The corporate small businesses were somewhat more likely to have a woman in charge than family small businesses.
On average, the small business owners in our survey were almost 55 years old, which puts them squarely in the baby boomer generation (Exhibit 4). That is significant from the advisor's standpoint, of course, because it means they are facing, or about to face, crucial financial decisions such as their own retirement, the death of their parents and-a crucial issue for family small businesses-business succession. Indeed, as we shall see, the issue of who's going to take over the family business is one that is paradoxically both top-of-the-mind and seldom seen to; family business owners know they have to address the issue but they put if off for as long as possible.
Assets And Net Worth
Based on both their investable assets and total net worth, it's easy to see why small business owners are attractive as both clients and prospects. Their discretionary investable assets were on average more than $1.5 million and their total net worth, including the estimated value of their share of their businesses, was nearly $12 million (Exhibits 5 and 6). That adds up to a total net worth of more than $7 billion for the 603 small business owners in our study.
The next question of course, given those sizeable assets, is how many investment advisors do they have on board to manage their personal finances? The answer: about two each (Exhibit 7).
What Drives Them
Finally, we asked the 603 small business owners what drove them and the top two answers, echoing almost every other study we have conducted among the affluent, were all about control and autonomy (Exhibit 8). Almost without exception, the respondents cited the desire to control their own lives as their key motivation, and almost as many cited their desire to be their own boss. As we shall see in our next article, that desire for control and autonomy not only drives the way small business owners think about their finances, but also dictates the way that their financial advisors should interact with them.
It is interesting to note that family-owned and corporate small business owners diverge as we move down their list of motivations. For instance, family business owners were almost three times more likely to say they were motivated by the desire to build or do something significant; their business was both the public face of their family and their legacy, and they want to be sure it reflects upon them favorably.
Understandably, those on the corporate side were far less likely to be worried, as their name was not linked with the history and actions of their company. That may also explain why, for better or worse (for richer or poorer), family business owners were far less concerned about becoming wealthy than their corporate counterparts; the family image came before the bottom line.
Lastly, and understandably, small business owners were far more motivated to want to work with their family (though it's interesting to note that less than half of them cited that as a driving motivation). Those differences in motivation will become more apparent as we began to more closely examine the financial lives of small business owners. Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.