You want stats on the exit planning opportunity? John Leonetti’s got ‘em. How about, “the number of retiring business owners is expected to grow from 50,000 each year to 750,000 each year by 2009.” Or, “half of all business owners are baby boomers.” Or, “the majority of business owners are now within 15 years of the traditional retirement age of 65.” It makes the head spin.
Leonetti, managing director of Pinnacle Equity Solutions, made it his mission to get the word out on the exit planning market potential. His Boston-based firm provides training to advisors who are looking to incorporate business exit planning into their practice.
As Leonetti relates, it was personal experience that got him involved in the niche.
“I was in a family textile business that was directly impacted by the passage of NAFTA,” he says. “It helped me understand business owners and what they go through. Being in a tough industry helped me appreciate how quickly the world changes. I was able to understand business owners and got to see what they were struggling with. It gave me a real appreciation for the people who sit behind those desks.”
In addition to his work with Pinnacle, he teaches retirement and estate planning at Suffolk University, his law school alma mater. His book, “The Art of exiting your business” was released last fall.
Leonetti sat down with Boomer Market Advisor to talk about the steps involved in gaining exit planning expertise, and the critical reasons for doing so.
BMA: Why is the exit planning opportunity so big right now?
JL: By different counts there are over 20 million businesses out there. If you take the publicly traded companies, there are only between two and four thousand, depending on how you measure it and the markets you include. That leaves the balance over 19 million businesses, roughly, that are in existence. There is a wave that is coming for business owners that need to get out. Most of these business owners need careful planning to execute a multi-year exit strategy. There is room for the relationship-based, trusted advisor to give advice in this area. Historically, this area has been the domain of transactional advisors. Our message to wealth managers is that you can participate and make a very meaningful contribution to this business owner community. There is no lack of opportunity out there.
BMA: Why don’t more advisors get the business portion of their clients’ assets, which is often the largest asset they have? It seems like a no-brainer.
JL: The problem is that most advisors are asking questions related to the liquid wealth of the client. They don’t ask the right questions about the business, which involve illiquid wealth. That is where the opportunity is — to take the focus off of how you get paid, which is on the liquid wealth. Start focusing on the illiquid wealth (that inevitably has to convert to liquid wealth) and you will do very well in this business. It takes a little bit longer of a lead cycle, but the irony is if you focus on the illiquid wealth you will get the liquid assets, because you’ll act in more of a holistic manner.
BMA: Do boomers even realize what’s involved with exit planning, or is it a case of they don’t know what they don’t know. Do they think it’s just a simple buy/sell cross-purchase agreement?
JB: I think it is exactly as you say — they don’t know what they don’t know. A lot of business owners we see don’t take proactive steps towards exiting their business. This happens for a number of reasons. First, there is a lack of available information. The people who have historically provided this type of advice have been transactional advisors. This means that if the business isn’t ready to be sold (because that’s what a transactional person does), then the owner is precluded from getting this advice. No. 2, there is a psychological component to exiting a business that cuts against the grain of how these business owners survive. They have lived in their businesses and are comfortable in their business. Without a proactive approach, it’s very difficult to start to formulate different strategies for their exit. There is a great opportunity for the relationship-based, trusted advisor to provide this information, and to start a dialogue to those business owners who don’t “qualify” for a transaction. The probability of success increases if they have more time to execute a multi-year transaction.
BMA: What extra skills do you have to have to really ramp up on exit planning knowledge. What does the process look like?
JB: I think in many ways too much education can be harmful, especially broad-based legal education. What an advisor needs to know is that there are a number of ways a business owner can sell or transfer shares in their business. They can either be turned into cash or transferred to intended beneficiaries. Once they understand the different options that are available, the conversation with the business owner opens up.
BMA: Run through a typical scenario.
JB: You might have a business owner that is doing $15 million in sales that has $2 million in profits, with 30 employees. He’s 62 years old. Does this business owner know that there are many ways to turn stock and assets into cash, or do they believe they just need to sell the business? This is a critical question. We have a number of points that differentiate between simply selling a business from developing an exit strategy. One of them is in understanding that a business owner can begin to plan for the transfer of shares through a gifting program to a family member that is in the business. When we talk about exit strategies, we also talk about protecting against large estate taxation. Business owners might not know that their estate planning can be part of their business succession planning. So that’s one area where you would have successors in place. The other end of the spectrum is selling the business. What is involved with that? What is the business owner’s motive? Do they want to get the highest price? Are there competitive reasons why they should be selling and do they know how it will impact their employees? Intuitively, this is what most business owners and advisors understand. They purchase something, and they are trying to sell it at a high price. There will be either short-term or long-term capital gains. And then there will be some fees. But between gifting and between selling there is a host of options. One of the most flexible would be an employee stock ownership plan. Does the business owner know that aside from selling, they can create a gifting program and begin to sell stock to that ESOP and exchange it for cash over many years? Most business owners don’t. So it is a niche business but it is not so complicated. They just need to find the information aggregated so that it makes sense to them so they can explain it to their business owner.
BMA: That’s what Pinnacle Equity Solutions offers, correct?
JB: What Pinnacle Equity Solution offers is support for the advisor that wants to provide this advice to the business owner. Globalization is affecting the wealth of many of these business owners. Their margins are getting squeezed and there is a perfect storm developing that consists of globalization, private equity and technology. Baby boomers are having a tougher time competing and wealth in their business is going to start to shrink. Exit planning can help protect that wealth. We are not suggesting that advisors should become management consultants and deliver solutions to business problems. We are saying they should recognize that there are certain industries that are going to become more difficult. They should either engage these owners to let them know they are aware of these competitive pressures.
BMA: How do you convince boomer business owners of the need for exit planning?
JB: An existing advisor to a business owner will already have the most important component in the client relationship — trust. Leveraging that trust, an advisor can begin the conversation about exiting the business and probably not experience as much resistance as you would think. It is the advisors who are holistic; true, trusted advisors who ask the question of the business owner, “What is it that you want from your business exit, be it two years or ten years from now?” And that business owner is going to open up to them and let them incorporate it into their retirement plans. The missing component is the information, and in the absence of information the advisor is unlikely to ask the question, because they won’t have the confidence to engage. Sure, there will always be business owners who resist it. But the resistance is breaking down as the baby boomers face health concerns, aging concerns and potentially another recession ahead of them. They realize a structured exit from their business that gives them a number of options is worth the investment of time and money.
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