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.

Needs Color Interest In Products   

Another important aspect of dealing effectively with small business owners is understanding any perceptions and preconceived notions about specific financial products. When asked, they express great interest in credit, investments, asset protection, retirement planning and cash management-all products and services that address their current business needs. Not surprisingly, things such as estate planning, trust services and life insurance get very little interest, in part because they address long-term issues and take a back seat to more pressing day-to-day issues, and also because it's not the services themselves that draw attention, but the benefits each service can deliver.

  
Business Owners As Clients

The best methods of accessing affluent business owners are no different than the best methods to access the broader universe of private wealth, and that is through centers of  influence-other professional advisors to the wealthy such as accountants and tax attorneys-and through current satisfied clients. Business owners who participated in the research survey were asked how they found their primary advisor: 63.3% cited a center of influence and 24.1% said they were referred by another client of the advisor. Although other methods were identified in the survey, it is essential to realize that centers of influence and clients account for nearly 90% of all referrals and overshadow other marketing activities in effectiveness.

Today, only 31.1% of small business owners characterize themselves as very satisfied with their primary advisory relationship. This is meaningful for a number of reasons. Most obvious is that the 68.9% that are dissatisfied or moderately satisfied will more readily consider working with another advisor, and will eventually take their business elsewhere if things don't change. There is also a negative multiplier effect to having dissatisfied clients. Research clearly shows that a client must have a high level of satisfaction before they will refer a friend, family member or colleague. So, the longer mediocre client relationships are sustained without improvement, the smaller the pool of potential referral sources becomes.

Summarizing The Opportunities

Small business owners represent that greatest potential for growth and wealth in America today. Historically, they have been a lucrative and complex client for advisors and will remain so, given the sophisticated tax and estate planning strategies required to manage liquidity events. What follows is a short list of considerations based on the aforementioned data for any advisor currently working with or targeting small business owners:

Freezing the current value of a business for estate tax purposes is an option for business owners who hope to transfer their business;

Helping business owners address their outdated estate plans is a valuable service by itself, but may also help an advisor identify other assets to manage;

Implementing a new estate plan for a business owner may require additional investments or life insurance;

Working closely with a business owner may enable an advisor to meet other executives at the firm who could be lucrative prospects;

Senior executives at small firms often find their retirement plans to be top-heavy and may be interested in other investment options to  offset their limitations;

Helping business owners analyze and replace underperforming investments in a retirement program may result in investment fees or product commissions and lay the groundwork to take over the plan's investment strategy or overall administration and recordkeeping;

Most business owners are narrowly focused on managing the day-to-day issues inherent to their business and will be more open to ideas, products and services that help them address those items quickly and effectively;

When discussing long-term issues with a small business owner, it is important to focus on the benefits of planning rather than the products themselves;

Building relationships with the attorneys and accountants who handle the professional and personal affairs of business owners can lead to a pipeline of affluent referrals.

Hannah Shaw Grove, a leading authority on private wealth, can be reached at www.hannahgrove.com. Russ Alan Prince is the president of Prince & Associates Inc., the foremost financial resource for affluent families and their advisors.