The Concerns of America's Small Business Owners

Family owners have a different perspective, and may need different solutions.

The following article is the second in a series based on a survey of 603 small business owners with a total personal net worth of more than $7 billion that will examine their financial lives, their use of products and services, and their relationship with their financial advisors.

Last month, we saw how small business owners, key contributors to America's economic vitality, are motivated by their desire for control and autonomy-it's the driving force in both their professional and personal lives. This time around, we'll examine the business and personal concerns that shape which financial products and services they might use.

A small business, as defined by the United States Small Business Administration, is one with no more than 500 employees for most manufacturing and mining industries and with a maximum of $6 million in annual receipts for nonmanufacturing industries. As noted last time, the SBA's most recent research concludes that there are 22.9 million small businesses in the United States.

Of the 603 small business owners in our study, 387 ran family businesses and the other 216 operated corporate small businesses. To qualify as a family business, the firm had to have one of more family member employed in a senior position, one of more generations involved in the business, and majority ownership.

The business owners in our study had an average net worth of $11.7 million and average investable assets of $1.5 million. In each case, family business owners far outstripped their corporate counterparts, with an average net worth of $17 million compared with $4.5 million and average investable assets of $2.1 million compared to $780,000. On average, the business owners each had two investment advisors.

The businesses in our study had an average of 116 employees and $31.8 million in annual sales. Two-thirds of the respondents were men, and their average age was 54.8 years old.

Small business owners have a very different menu of financial needs than do other affluent investors, including business succession plans, key person insurance and buy/sell agreements. One thing they do have very much in common with other affluent investors is the fact that many of those plans are incomplete or outdated.

Finally, as noted, their main motivations for creating or managing their own business were the desire to control their own lives and to be their own boss, both cited by more than 90% of the respondents. In our extensive surveys of the affluent over the past decade, control is almost always at the top of the list of motivations. Self-made business owners and entrepreneurs in general are used to being in charge, and that impacts the way that financial advisors should approach and work with them.

Business Concerns

As part of our study we asked the respondents about their business concerns, and as you can see, managing growth, costs, and taxes topped the list (Exhibit 1). For the most part, all of the concerns were shared to a similar degree by both family and corporate business owners, with one notable exception: business succession. That makes sense because family business owners want to keep the business in the family and were concerned about which, if any, family member would succeed them, a decision that could be complicated by family politics.

Corporate owners, in contrast, are often looking for an exit strategy that has nothing to do with business succession. Corporate owners also had far less of an emotional investment in the decision because their successor was not likely to be a relative.

Corporate owners also were more concerned about benefits for senior management, which again makes sense because, unlike their family business counterparts, many senior executives don't own or have a large stake in the business itself and need to be well vested so that they're motivated to stay and succeed. Family ties are stronger than deferred comp.