“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

advisor says: you wrote a great book some years ago about asset allocation (Risk is a Four-Letter Word). I still use its concepts in my practice today. I also know that you currently write a lot about succession planning and business valuation, particularly for advisors. Here’s a question that’s been running through my head that brings the two themes together: how do I get my business-owner clients to include the value of their businesses in their asset-allocation decisions?

A number of my business-owner clients are talking about selling all or part of their business to fund their retirement and, in many cases, it will be a big payday for them. Yet, if I try to suggest that they include the business as part of the “equities” portion of their portfolio now, they balk, saying their business is separate from their investments.

I don’t want to argue with them to the point of jeopardizing the relationship. Nor do I want to suggest they put all their investments into fixed-income products to compensate for the investment in the business. If I simply did that, they wouldn’t think I was bringing much value to their situation. It bothers me, however, that we almost always end up with a portfolio that may not be appropriate for the client’s stated risk tolerance, given the equity value of their business.

How can I get these clients to treat their business for what it is: an investment – and, often, a very risky one?

Coach says: It is a curious aspect of human behaviour that allows clients to rationalize that investment in a privately owned business is different from investment in a publicly traded stock, when, in fact, both are expressions of confidence in the management of an enterprise and both carry risk.

Perhaps business owners feel at least somewhat in control of the success of the investment in their own company as a result of being on the job every day. Yet, these clients often fail to appreciate that a public firm typically has many people with specialized talents, along with systems, processes and accountability built in to maximize the likelihood of success.

From my own experience as a director of both public and private companies, I feel confident in saying that entrepreneur-operated enterprises, in general, tend to behave more erratically, have little or no strategic planning processes and are far less willing to invest in the business. In short, these companies are considerably riskier investments than stocks.

So, consider a client who has, for example, a $1-million portfolio invested 50% in stocks and a business worth $5 million. How do you get him to concede that he actually has $5,500,000 – more than 90% of his wealth – allocated to equities (and most of that concentrated in one micromicrocap company)? It is not a statement your client would expect from you.

So, your job is to help your business-owner clients see the riskiness of differentiating between their stake in their own companies and their stake in other securities.

One way to do that might be to highlight and emphasize those differences from an investment-management point of view rather than a business-management perspective. Below are some examples:

Clients hire wealth-management experts – you, in this case – to (among other things): assess tolerance for risk; take stock of currently held assets; set objectives based on short-term and long-term needs; apply proven principles of investing to establish money-management strategies; and periodically review objectives and adjust as necessary.

Business owners seldom hire wealth managers to help to determine: the value of their business; the market for the sale of their business; the portion of their net worth that is tied up in their business; or how to transfer ownership or management to family members or other shareholders.

Another approach you might consider is to become more involved with your clients in planning their succession or exit from their business. The process is essentially the same as those I recommend for advisors themselves. The broad-based steps are:

1. Prepare yourself emotionally to hand your life’s work over to someone else.

2. Prepare yourself financially to have the post-exit lifestyle you want.

3. Value the business to determine whether it will provide the cash or income desired.

4. Set your exit date.

5. Choose your exit option.

6. Identify a successor.

7. Strike the best deal you can that is good for all parties.

8. Implement the transition to ensure continuity of the business.

Of course, there is much more behind each of these steps, and you can find additional information in my five-part series on succession planning published in the October 2013 to February 2014 issues of Investment Executive.

The important thing to note, however, is that business owners often have no one to talk to regarding when or how they want to monetize and leverage the enterprise they have spent their lives building. Accountants want to crunch numbers; lawyers want to document the transaction; bankers want to be assured that operating lines are secure; and customers want uninterrupted service. Even family members are often more interested in having more of the business owner’s time, as well as enjoying the newfound wealth that will come with sale of the business. No one, however, can discuss intelligently all the varied aspects of succession decision-making – except you.

At some point, every one of your business-owner clients is going to leave his or her business – voluntarily or otherwise. You, alone, as their trusted advisor, can guide them down a path that puts them in control of their exit and gives them confidence in the decisions they make. You can help these clients reconcile the trade-off between succession planning (what happens to the business after the founder is gone) and exit strategy (what happens to the founder after the business is gone).

As you might do with these clients’ other investments, you can co-ordinate the efforts of the clients’ other professional specialists, all within the context of a financial plan and long-term investment strategy.

By getting involved in the process early, you can do three things for yourself. The first is to put yourself in a position to have more meaningful conversations with your business-owner clients about the asset allocation of all their investments, including the value of their business. The second is to add value, so that any concern on your client’s part about your fees goes away. Finally, the intimacy of the discussion about what your clients want to achieve as a result of their succession will deepen and strengthen your relationship.

And when that big payday comes, you will be first in line to manage the reinvestment of these businesses’ sale proceeds.

George Hartman is managing partner with Elite Advisors Canada Inc. in Toronto. Send your questions and comments to ghartman@eliteadvisors.ca. For past articles and informative videos, visit www.investmentexecutive.com.

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