Robert W. Baird & Co. financial advisor Lori Gervais recently started working with new clients—a couple in their 70s with a small business—who are facing some harsh realities. The couple, who own a medical device company, have had their son working in the business since he was 15 years old and planned for him to succeed them in running the firm. Now feeling ready to retire, they envisioned that the son, 38, would buy them out of the business and provide them with $250,000 in annual income during retirement.

But they had never openly discussed those plans with their son, Gervais says, and he has now taken on a senior executive position at an international engineering company. He recently told his parents he had no intention of taking over the family business. "It was a surprise to them," Gervais says.

The couple are now figuring out what their next steps are—including having the company audited for the first time, preparing the business for sale, and coming to terms with the fact that their retirement income is likely to fall short of what they had envisioned. "If they would have done any of that earlier, they wouldn't be in this situation," Gervais says.

Advisors who work with small-business owners often have the opportunity to have a crucial impact on a client's financial well-being. But this can require specialized knowledge, a willingness to coordinate with professionals in other fields, and skill in handling emotional issues. And it can hinge on making contact with clients early enough to offer them real help.

A survey, "Business Owner Spotlight," released by Merrill Lynch in November, found that just 39% of 250 U.S. owners of businesses with $10 million to $250 million in revenues were working with a financial advisor to come up with a succession plan. At the same time, 33% of the respondents said they had not worked with a financial professional to determine what would happen to their personal wealth if they could no longer run their business.

Gervais' clients had actually worked separately with a business attorney and a certified public accountant over the years, but those professionals did not interact with each other. "It's not that business owners have the wrong professional staff; it's that they treat each one in a silo," Gervais says.

Starting the Conversation
Many financial advisors already work with small-business owners but have not delved into their businesses. Hilliard Lyons, a firm in Louisville, Ky., set out to address this problem when it launched a six-month training program for 20 advisors who want to make business owners a stronger focus of their practices. The training sessions have covered a variety of topics, including buy/sell agreements, employee stock ownership plans, and family governance.

Where they once might have been satisfied simply to verify that a business owner has a buy/sell agreement, advisors who have participated in the program now help in improving those agreements, says Jaleigh White, director of wealth services at the firm.

One advisor reported being able to have a positive impact on the owners of one small business in a very short time. "She's just shocked at how willing they were to open up with information and how many opportunities she spotted right away," White says.

While having those conversations, it is imperative to include other experts like accountants and lawyers, says Jim Hennessy, senior vice president of investments at the McDonough Hennessy Group at Wedbush Securities in Roseville, Calif. That approach has been useful as small-business owners have become more worried about recent changes in income tax laws, he says.

Having those conversations also means being prepared for the emotions that surface, says Brad Wheelock, senior vice president and branch director of the Private Client Group at the Wheelock Investment Group of RBC Wealth Management in St. Cloud, Minn. "It's talk less, listen more," Wheelock says. "Some of the softer skills that you can't spreadsheet are more important than necessarily measuring alpha, beta, [and] risk metrics that we're typically known for. It's much more emotional. I think that the best success that we've had [occurred] when the entire family was a part of the process."

Including the Whole Family
Harvey L. Snider Jr., a financial advisor at Merrill Lynch, has been working with small-business owners since he started his career in 1981. Now the Snider Team, based in Duluth, Ga., includes his two financial advisor sons: Luke, who joined in August 2009, and Sam, who followed in May 2011. Having a multigenerational team has helped as Snider works to navigate difficult conversations with his clients, he says, particularly when those conversations include potential successors.

"Often, the senior business owner might not be as inclusive of other family in ownership positions or leadership," Snider says. That has prompted him to suggest that those owners bring along their potential successors to a meeting, while he brings his sons. "It sets a different agenda and allows for an environment where addressing difficult questions can arise," Snider says, such as creating contingency plans for the business if the owner's health declines or if he or she dies. "I don't mind being a catalyst for addressing difficult questions. The longer I postpone dealing with a difficult issue, the more the consequences grow," Snider says.

In his own practice, Snider strives to set an example of how to work successfully with multiple generations. Snider's son Luke runs a weekly strategy review and implementation meeting, while Sam is in charge of certain marketing tasks for the team. "I'm trying to practice what I've preached," Snider says, while acknowledging it is "not easy" to give up control of the business he has run for 32 years.

Gervais, the Baird advisor, agrees that getting all family members involved in discussions about the future of a family business is imperative. Gervais is a senior vice president at the Gervais Group in Mequon, Wis., in practice with her financial advisor husband, Roger.

Gervais' team works with family foundations as well as family-owned small businesses. The planning process includes having two or three meetings with clients before making any investment recommendations. In those meetings, Gervais' team focuses on developing a vision for the business. "It all comes down to: What is the business purpose? Why are we all in the business? Should we all be in the business? What is the vision for the business long term?" Gervais says. "Sometimes the founder has not expressed that, and so that is helpful not only to keep the culture in the business, but also to ensure that the successors continue with that."

In Transition
When Michael Wallace and Kirk Wendorf, a Los Angeles-based UBS financial advisor team, first met with the owner of a four-year-old health and wellness company, he had spent 18 months searching for the best way to refinance the firm's debt, which had an interest rate in the teens.

The debt consisted largely of financing from friends and family, as well as revolver debt issued by another company. The executive had looked at other options, including community banks and private equity, but he didn't want to cede control of the business. "What he wanted was almost a loan against intellectual property and really a bet on him, and there weren't too many banks that were willing to make that bet," Wendorf says.

But, within six months, Wallace and Wendorf identified a suitable option, which they refer to as a "needle in a haystack financing" that reduced the company's costs by half. That funding came through a loan program that was willing to finance the company because it had overseas manufacturing in Asia. To find that opportunity, the financial advisor team drew on existing relationships, according to Wallace.

Wallace and Wendorf started working together in 2005 at Lehman Brothers and moved to UBS in September 2008. Wallace had experience working with large institutions, while Wendorf worked mostly with families and executives of small businesses. Together, they focus on offering their small-business clients the same resources and services that their large institutional clients receive.

Reaching a successful resolution for a small-business client requires walking in with an open mind, Wallace and Wendorf say. At first blush, the advisors may think a company needs to raise funds, for instance, but after a meeting they may decide that a better direction would be to find a buyer for the company's intellectual property to allow the owner to achieve an exit instead. That was the case with a software technology company they worked with recently.

"The thing that defines [our] practice is we really approach every client with no preconceived ideas or prepackaged solutions," Wendorf says. "We really just let them guide us."

Heading for the Exits
About a year ago, Mitchell Rock, a New York-based financial advisor at the Rock Group at Morgan Stanley, says he met a prospective client who was using a dubious source to find an investment banker to sell his staffing business: the Internet. The experience convinced Rock, a member of part of Morgan Stanley's Business Owner Executive Council, that the services his team is providing are definitely in need.

Rock's team spends most of its time working with companies valued at $20 million to $100 million. When clients are considering the sale of a business, there are many matters to be dealt with. These include not only how much money they will want, but also what kind of lifestyle they hope to maintain and the philanthropic and charitable efforts they hope to pursue. "Once we know that and we can establish a valuation for the company, then we can begin the process of walking them through the stages of creating a liquidity event," Rock says.

Working with businesses poised for a sale means surrounding business owners with the right professionals, Rock says. At Morgan Stanley, which has relationships with multiple middle market investment banking firms across the country, this means finding an investment banker equipped to handle the client's goals.

The exit can come in any of many forms, such as a management buyout, employee stock ownership plan, strategic buyer or a financial buyer. And the owner can choose to relinquish some or all of his or her control and decide on a time frame. "We spend a lot of time trying to figure out what the true goals of the family are, as well as the goals for the individual company on the corporate side," Rock says.

For one family Rock worked with, giving up a 30% to 60% ownership stake was more favorable than injecting $2.5 million of their own wealth to get the firm, an educational training company, to its next stage of development. Those owners, who inherited the business and are in their early 40s, plan to resell the company in four to seven years.

Rock takes credit for improving the outcome for another client, whose family-owned distribution company was negotiating with two private equity firms when Rock first began working with him. Rock's team intercepted the process and looped in an investment bank and other industry experts. "Now there's competitive bidding and this family will get more money when they sell their company," Rock says. "It could be $10 [million] to $20 million [more]."

When Rock's team calls business owners, he says, it has a unique selling proposition compared with the private equity firms that are commonly also soliciting them. "We're trying to integrate the equity they have in their business with their personal financial planning," Rock says. "They don't get that call very often."

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