As a wealth advisor, you understand that a business owner's company often represents their most valuable asset and the bulk of their wealth, representing both risk and opportunities. One critical aspect is having an exit strategy in place to de-risk the business and maximise its value. In this article, we will explore several situations where selling a business can be advantageous, allowing you to guide your clients effectively.
1. Concentration Risk
As a wealth advisor, it is important to recognise that business owners often have the bulk of their wealth in their business, which poses a significant concentration risk. While they may reinvest profits into their businesses, their investment portfolio may appear diversified across various asset classes. However, when considering their total portfolio, the business remains their largest asset, leading to overexposure to a single asset class.
To mitigate this risk, it is advisable to suggest to clients to sell a portion of their business. By doing so, they can unlock significant value and secure their wealth. The proceeds from the sale can be moved offshore, providing them with exposure to global investment opportunities. Simultaneously, bringing in a strategic growth partner with capital and access to new markets can drive exponential growth for the business. This step can serve as their initial move towards their eventual exit strategy.
While clients may end up with a smaller portion of the business, it is more advantageous to have a significant share of a larger pie than complete ownership of a smaller one. As their wealth manager, it is crucial to have an open discussion during portfolio reviews, presenting the facts and highlighting the benefits of diversification. This approach can serve as an eye-opener for clients and prompt them to consider taking action to reduce concentration risk and explore new wealth-building opportunities.
2. Scaling up with a Growth Partner
Bringing in a growth partner can be a beneficial way to scale up a business while still retaining control. It allows business owners to use the partner's funds to drive growth and de-risk their business without completely exiting. Many owners discover that they are still passionate about their company and want to secure their family's financial wellbeing while being involved in its growth. A minority partner with corporate skills can be an ideal option to take the business to the next level.
However, an equity deal should be carefully considered, and the right partner, not just one with money, should be chosen. The business owner must have confidence in their ability to work with the prospective partner and envision a future where a smaller portion of the business is more valuable than the entire business pre-deal.
In South Africa, incorporating an empowerment component into businesses is both a strategic decision and an opportunity to unlock wealth. The goal is to make the new business more valuable than the original one by leveraging the opportunities and skills brought by the new partner.
It is important to recognise that seeking an individual partner rarely fulfils all the synergies, skills, and funds required by a business. Instead, the focus should be on finding a company, typically a private equity fund, with a proven track record and control over accessible funds. As an advisor, it is crucial to help clients understand the distinction between simply meeting requirements and finding a strategic partner, particularly in the context of Broad-Based Black Economic Empowerment (BEE). Bringing in a strong partner, even at a 40% ownership stake, can be the initial step in the client's eventual exit strategy, whether it involves a partial exit or structuring the business for a complete exit. Private equity partners excel in this area and can assist in ensuring a lucrative exit strategy.
3. Time and Energy – or Lack Thereof
Many business owners experience a loss of energy and motivation over time, which can significantly impact the growth of their company. In such cases, selling the business can be an opportunity to inject new energy and drive growth. Whether they sell the business fully or partially, the goal is to find a buyer who can propel the business forward exponentially.
By going to market and finding an acquirer who can do better with the business, the owner can benefit from the acquiring company's capital for expansion, access to new markets and customers, innovations, and fresh energy and ideas. As a financial advisor, it is worth initiating a conversation with clients about the possibility of selling a part or all of their business to take some value off the table.
4. Succession Planning
As a wealth advisor, it is important to discuss succession planning with your clients. The idea that they will pass their business on to their children is becoming less common, as fewer children are interested in taking over or have moved away. Many entrepreneurs appoint a managing director to run the business when they step away, but this approach often fails because they lack the necessary skills to manage such an appointee. Choosing a managing director as an exit plan poses significant risks as business owners never truly relinquish control and remain burdened by the responsibilities they want to escape.
Selling the business itself can serve as a succession plan, offering life-changing outcomes for both the owner and their staff. However, it is crucial to emphasise to business owners that selling a business typically takes two to three years or more, so they must plan ahead and not leave this process too late to achieve true freedom from their business responsibilities.
Ultimately, as a wealth advisor, your role is to guide your clients through these critical decisions and maximise the potential of their business assets. By understanding the risks, opportunities, and timing associated with selling a business, you can help your clients navigate the process successfully, ensuring their financial wellbeing and long-term prosperity.