What Are Your Client’s Plans for Their Business?

There are 33,185,550 small businesses in the US.1 Surprisingly, the Small Business Administration (SBA) defines “small business” as $1 MM to 40 MM in revenue, with 100 to 1,500 employees.2  This varies by industry. According to shopify.com, 99.9% of all US companies are “small businesses.” 5.4 million have under 20 employees and 27 million have no employees.3  Despite the contradictions in these numbers, as a financial advisor or accounting professional, you likely have many “small businesses” as clients.

Over time, I have gathered about 4,300 first level connections on LinkedIn. The vast majority are people I have never met. Some are business owners. Out of curiosity, I asked one about his long term plans for the business they started. As a financial professional, have you asked your clients that same question? Their answer should greatly effect how you and your client approach long term financial planning, especially if the business is their largest asset.

1. The generational business.

Your client’s plan is to keep the business in the family. They might have started the business or they might have inherited the business from their parents. They intend to eventually step away, leaving the management of the business in the hands of the next generation.

Considerations: How old is the next generation? Are they “on board” with continuing the family legacy and managing the business? Have they been brought into the firm, gradually assuming responsibilities? Do they learned the necessary managerial skills? If the immediate family is not “on board,” what about their spouses and partners? Do they bring management skills to the table? If lots of the answers are “no” can the firm bring in outsiders to manage the business while still maintaining family control?

2. Taking the company public.

Your client started a business in the technology or medical science field. Their long term goal is to do an IPO and get their big payday when the company goes public.

Considerations: Does your client’s business have a patented product or a unique value proposition that cannot be easily copied? How quickly can they scale up the business? What level of revenue to they need before an IPO becomes feasible? According to tipalti.com, larger companies might make the IPO move when revenue is $100 million or higher. They reference the JOBS Act might bring the threshold to below $50 million in revenue.4

3. Selling the company to an industry leader.

According to Zippa.com, 16% of Series E startups are acquired.5  Series E refers to one of several later stages of startup funding.6  Theoretically, at that stage, about 20% or less of startups remain.

Considerations: This business is likely not a “operating in their garage” business. They have been getting professional advice for years and have a clearly defined business plan to help them get there. You are likely deeply involved already. Are they on track?

4. Employee buy out.

This can be an ideal when the family isn’t keen on continuing the business into the future, yet you have a loyal cadre of employees who have been with you for the long term. I know someone who took this route with the financial planning firm he founded.

Considerations: This needs to be initiated in advance, so your employees understand their jobs would simply vanish with the business or a new owner would bring in their own staff. The business needs to be in the best financial health possible. The owner needs to understand when and how they step away, how gradually, how they get their payout and over how much time.

5. The business that is similar to a “hobby”.

Your client might have a small business that supplements their retirement income. It is just them, working from home. They might be an industry consultant, a writer or sell lots of stuff on eBay. They are the primary asset. The business has negligible value if they are no longer in the picture. The IRS has several qualifiers, such as keeping accurate business records, does your business earn a profit and do you depend on the income generated.7  These individuals would likely be classified as “self employed,” many working in the “gig economy.” There are about 16.5 million self employed people in the US.8

Considerations: It would be difficult to see a business that depends entirely on something only you can do if you are no longer in the picture. If you passed away or lost interest in the business, the major issues would be winding it up and collecting outstanding debts.

If your client has a business, what are their future plans? This is a key element to consider when helping your client with financial planning.

2 https://www.census.gov/library/stories/2021/01/what-is-a-small-business.html

Related: What To Talk About in Annual Reviews