If you have clients who are business owners, you’re probably used to discussing taxation, succession planning, and other intricacies. But what if their businesses are in declining industries?

It happened a lot during the pandemic—businesses that failed through no fault of their owners.

So how can advisors help these clients weather the storm?

Proactive viability assessments
“Owners of closely held middle-market companies often lack objectivity when it comes to evaluating the company's performance,” said Sandor Jacobson, a principal at Plante Moran and leader of its Chicago-based restructuring and transformation practice.

If an advisor notices that a client’s business is in jeopardy, he said, it’s a good idea to conduct a “viability assessment, to gain an initial understanding into the financial condition of the company. This process allows financial advisors to gain a more robust understanding of the challenges and have more productive discussions with owners of failing companies.”

Then, if it turns out there is a high probability of failure, advisors should be sure to “show empathy and protect the owner personally,” said Jacobson.

Be honest
Hard as it may be, honesty is the best policy.

“The first thing I say [to a client whose business is failing] is a line my grandmother used to say to me when I asked for her advice: ‘Do you want me to yes you to death or give you my honest opinion?’” said Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.

The next step, Bernstein said, is to compliment the client on aspects of the business that are working or have worked well, followed by a no-nonsense evaluation of the unavoidable challenges it’s facing. That is, mix the good news with the bad.

“Then I tie a bow on it by providing a positive comment or suggestion on next steps,” he added.

Bernstein calls this the sandwich approach, inserting the difficult assessment within more uplifting or constructive observations. “Honesty is the most important things to communicate with the client, but how you do it can make all the difference in the world,” he said.

Be compassionate
With these difficult discussions, it’s important to be nonjudgmental and compassionate. “Listen more than you talk,” said Bernstein.

The reasons for that should be obvious but may be easily forgotten: to the business owner, it’s not just a job. It’s something closer to a calling.

“For virtually every business owner I work with, there are deep emotional ties to the business,” said Joseph Maier, director of wealth strategy at Johnson Financial Group in Milwaukee, Wisc.

If your client is the founder of the business, he said, the relationship is “not unlike that of a parent to a child.” If your client inherited the business, the business may feel like an obligation to dad or mom, or other ancestors. “All of these issues are central with failing businesses,” said Maier. “Managing and understanding these emotions is critical.”

Client self-esteem may be at stake
Jason Katz, a principal at Bartlett Wealth Management in Cincinnati, Ohio, agreed. “Business owners often view their business as an extension of themselves,” he said. “Their identity is tied to the business and its ultimate success or failure.”

A declining business may feel like a sick or dying family member. In such cases, Katz said that he feels his role is to help the business owner “grow and nurture this important asset in preparation for an ultimate exit,” he said.

Set boundaries
The emotional connection that such clients feel for their businesses can have a downside. In an attempt to rescue a sinking business, they may make panic decisions. They might, for instance, sink all of their personal assets into the business in order to try to save it.

“It’s really important when a business is struggling to set up boundaries around the owner’s personal financial assets,” said Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group in Newport, Ore. “Our job as advisors is to speak straight and point out what the business owner can’t see for themselves. When you are in the bottle, it’s hard to read the label!”

If the business owner is beating herself or himself up over business declines, she said remind the client that “we are not our businesses.” It’s critical, she said, to help the client separate self-worth from business worth or net worth. “We could also choose to look at failings as an opportunity to learn and grow,” she said.

Practical factors
Of course, there are also practical considerations.

“The most important thing for an advisor to do is develop a shared understanding of the reality of the failing business,” said Tom West, a senior partner at Signature Estate & Investment Advisors in Tysons, Va. “It’s tough for an advisor to give solid counsel absent some consensus about the realities of the situation.”

For instance, he said, is failure a certainty? If not, “how will we know when an imminent failure threshold is reached?” he said. Other considerations include how much of a priority the business owner places on taking care of the employees. What will be the financial harm from the business failing? Can the business be closed down cleanly or are there loose ends?

Assessing risks and next steps
That last question is vital, said West. You must identify any financial, legal, or reputational risks of the declining business to the owner and employees. Then, he said, identify possible remedies, and the resources needed to make those remedies happen. Finally, he said, make a plan that includes the best timing and circumstances for executing remedies or other next steps.

“Owners of declining businesses should be especially mindful of any liabilities of the company that could trigger personal exposure,” stressed Jacobson at Plante Moran, citing guarantees to secured creditors and landlords, unpaid payroll taxes, unpaid sales taxes, unpaid payrolls, and other employee benefits.

A restructuring consultant might need to be brought in to formulate an emergency cash-flow strategy.

Bartlett Wealth’s Katz noted that some struggling businesses might be transferable. If so, whether it’s to be gifted to a family member or sold to a third party, it’s wise to try to keep it “a healthy, clean business where the value of the business is not tied to the owner’s daily participation,” he said.

Innovate or die
“The pandemic really tested the resilience of many businesses,” Katz added. “In some cases, entire industries were eliminated, and the business had to either innovate or die.”

One client of his—a craft distilling business—seemed doomed when many of the restaurants and bars it served shut down during the pandemic. But the business was otherwise sound, so the owners adapted. “They decided to pivot [and started] producing hand sanitizer in bulk,” he said. That move kept the company afloat until it was able to switch back once restaurants and bars reopened.