New research by US Trust reveals challenges and trends among wealthy US business owners, including that many don't have an exit strategy.

There is a “big unmet” need for advice on business succession planning as well as other issues such as personal liability concerns that owners face, which is a huge opportunity for financial advisors, Mitch Drossman of US Trust told Family Wealth Report.

The firm has released research representing responses of 118 business owners with at least $3 million in investable assets, as part of the 2015 US Trust Insights on Wealth and Worth survey.

It shows that many business owners are not taking enough steps to protect their personal and family’s financial assets, and are struggling with “competing priorities” across their work, personal and financial lives. But perhaps most notably, 61 per cent do not have a formal plan for transferring ownership of their companies when/if they sell up or transfer ownership – and 81 per cent said they have never talked to an advisor about succession planning.

The main reasons business owners say they haven’t drawn up a formal plan include: that they aren’t ready to retire; they have postponed making a decision; their families or colleagues are already aware of their informal plans; their wishes for the business have been outlined in a will; and/or they are too busy with the daily operation of their business. 

The opportunity for advisors is clear, said Drossman, when considering that 45 per cent of business owners who have a financial advisor also have a formal business succession plan, compared to 27 per cent of those who do not have an advisor. Meanwhile, among business owners who have an advisor, there is a “relatively high interest in discussing business succession planning,” he said: just 19 per cent have had these discussions, while another 16 per cent want to discuss this (or discuss more).

“We also know from a recent paper that US Trust commissioned with Columbia Business School...that there is a lack of information out there on how to transfer ownership,” added Drossman, national director of wealth planning strategies at US Trust.

Besides issues related to succession planning, the findings also point to an opportunity for adviors to help business owners deal with some of the personal liability that comes with many business structures. They are concerned about how their business affects their personal reputation and wealth, for example, and worry about work and personal threats such as: guarding their personal reputation (56 per cent); protecting their businesses from lawsuits (44 per cent); defending their data from hackers or cyber attacks (42 per cent); finding business advisors they can trust (33 per cent); and access to credit (24 per cent).

What constitutes a “formal plan”?

Drossman described business succession as “the process of planning the path of a company from the current set of stakeholders to the next,” of which there are two key components: ownership planning and management planning.

“But, good succession planning requires more than that – it requires a holistic, multidisciplinary process to assure owners a smooth transition of ownership and control of their business – whether it be to their own heirs/children, someone else within the company, or an outside party,” he told Family Wealth Report. “A good plan focuses on business decisions, but also allows the owner to incorporate personal goals and aspirations for the business and future owners.”

All plans should also include, he said: the owner’s goals; key people affected by the planning; issues that may affect each “key person” during the transition; critical issues affecting transition; a summary of all significant tax issues; analysis of how the owner’s goals would be accomplished; the impact on each “key person”; and a mechanism to monitor the process and review for changes that may occur.

“It is rare that a plan provides the owner and key persons all that they 'want' from the plan,” he said. “Most plans have many compromises based on desires and limited resources. A good plan strikes the right balance so that all feel involved and that at least some of their desires were met, or at a minimum, that they feel ‘heard’ and their desires where considered. A good plan should be dynamic, and not static.”

Business owner characteristics

According to US Trust's latest findings, many owners and entrepreneurs share similar attributes, including: that their personal and business lives are closely intertwined (for example, 44 per cent said most of their income and financial assets are linked to their firms, which is particularly the case among those under the age of 50); that while 76 per cent said their health is their most important personal asset, 35 per cent have sacrificed their health for the sake of their careers; and a desire to give back to society.

Meanwhile, it emerged that most wealthy business owners surveyed are self-made - 77 per cent being entrepreneurs who founded their businesses. Another 15 per cent acquired a company or bought out their partners, while 8 per cent inherited their firms.

But regardless of whether they founded their company, inherited it, or purchased it, business owners of all stripes struggle with competing priorities across work and personal issues, Drossman told this publication. “They are often wrapped up in running their companies and often don’t ever plan on retiring. Their life is their business and the business is their life. This makes it all the more crucial for them to have not only an exit plan – but an integrated wealth, business, investment banking plan - given how closely intertwined their business and personal lives are.”