Small business owners represent the biggest future opportunity for wealth creation and wealth managers.

    Today's private wealth-fortunes, by any other name-is most often linked to a business. In fact, more than three-quarters of ultrahigh-net-worth individuals (with an average net worth of $89 million) identify their source of wealth as a function of business ownership, which can include owning all or part of a private business, selling all or part of a private business to another organization or individual, or converting a private business to a publicly owned business.

This fact pattern means that being rich in today's world is different than it was several generations ago. Far less money, as a percentage of overall wealth, is being inherited, and far greater sums are being generated through successful business ventures. It is safe to say that the business owner is the face of today's affluent. So, understanding as much as possible about business owners and their financial behavior, needs and motivations will help advisors connect with them more readily and service them more effectively.

In early 2006, we conducted a research survey with 412 small business owners that each had a minimum of $500,000 in personal investments and average investable assets of $1.9 million. The majority of survey respondents, or 55.6%, were between the ages of 45 and 60, with just 16.0% more than 60 years old and 28.4% under the age of 45. As with many surveys conducted with wealthy individuals, nearly three-quarters (73.1%) of the respondents were male.

Each business owner was asked to identify the core focus of their business; 72.6% cited services while 27.4% were in the manufacturing end. Service businesses might include a chain of retail clothing stores, construction or a liquor distributorship. Conversely, manufacturing businesses create goods that are ready to be sold through retail or wholesale channels, or components that are used by other products.

This is a distinction worth noting-since the majority of business owner prospects and clients will come from service-oriented businesses, having a familiarity with the major issues and concerns facing these types of businesses will carry an advantage. Furthermore, the sheer number of small businesses that fall into the service category indicates both a demand for, and a value placed on, services that supersedes products alone and can impact the dynamic between providers and consumers. And finally, prospective clients from the service business should have a greater understanding and appreciation for the way financial advisors approach their business model and their client relationships since advisors themselves are in the business of service.

Monetizing A Business   

Tellingly, many small business owners are so focused on growing and running their businesses that they haven't taken the time to establish goals for themselves and the ownership of their organizations. Roughly 40% of respondents remain undecided when asked about their long-term objectives for their businesses. Almost 30% hope to sell the business, and the remaining 30% was evenly divided between keeping the business and transferring it internally to a person or people already involved in management (Exhibit 1).

Importantly, there are a number of financial and tax planning issues that business owners must address when taking any of the actions mentioned previously. Selling a business can be a significant liquidity event for a business owner and, as such, can carry a significant tax burden. Steps can be taken to mitigate taxes, yet only a small percentage of the business owners considering a sale or an internal transfer had taken the appropriate measures (Exhibits 2 and 3).

Tax planning tied to the sale or transfer of the firm is rarely sufficient for business owners with sizeable wealth, and it is equally important for them to have an up-to-date estate plan that reflects their current net worth and their desires for those assets. This is another area that most small business owners have overlooked (Exhibit 4).

Estate Plan Is Less Than Five Years Old

Advisors who can help small business owners prepare adequately for a liquidity event, lessen the tax bite from the sale proceeds and begin the estate planning process will be well-positioned to assume other responsibilities. An advisor who works closely and consultatively with a business owner, and provides his or her own expertise and access to a network of other professionals, will be first in line to manage a major portion of the liquid assets once the business has been monetized. Also, ongoing involvement with the business and the management team often reveals other opportunities that might not be visible to a less engaged advisor.

For instance, 84.7% of small business owners have a retirement program but only 37.5% of them consider themselves very satisfied. This means that more than 60% of businesses would consider another provider for retirement plan administration, investment management options or both-a worthwhile opportunity for most advisors as the average assets in these plans are $12.7 million.

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