How Advisors Can Help Business Owners With Concentrated Positions

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How Advisors Can Help Business Owners With Concentrated Positions
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Owners of privately held businesses face unique challenges – most importantly, weighing how the sale of their company will affect their financial future and life style. Advisors are eminently qualified to help evaluate those decisions.

The majority of those who hire us to sell their businesses have the vast majority of their net worth tied up in their illiquid companies. Yet, they don’t see their companies as risk assets, despite the fact that their liquid investments – representing 1%-15% of their net worth – causes more anxiety than their privately held business representing over 85% of their net worth! Perhaps it’s about control; they intimately “know” and in most cases they created their privately held business – so they don’t see it as a risk asset. An investment account handled by someone else is outside of their full control and sphere of influence.

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Here are three stories of entrepreneurs who had at least 85% of their net worth tied up in their business. We’ll start with the “good” story.

The big pay day

I first got to know Phil nine years ago, when he was selling off a smaller division to focus on his core competency. We stayed in touch over the years. He’d show me his financials, talk about what was happening at a high level and I’d give him my thoughts. Although I sell companies for a living it didn’t feel like Phil was in a place to sell; he was enthusiastic about the business, saw a lot of upside and had a lot of energy and enthusiasm. Three years ago I talked him out of selling ownership in the business; he was growing rapidly and was running out of cash. He wanted investors. However he had a rock solid balance sheet and just needed a better line of credit. I introduced him to several banks and he obtained the financing he needed without giving up ownership.

Two years ago he asked for referrals for supply-chain consultants. He felt that to take his company to the next level he had to tighten up his supply chain, and this exercise didn’t get him excited. He was a creative entrepreneur; tightening up his supply chain didn’t get him pumped up. He said the business was a bit on autopilot and he felt a little bit like a caretaker. He looked at me and said, “I wouldn’t sell it now. I’m doing too well.” When someone asked Andrew Carnegie what the secret to his financial success, he said, “I always sold too soon.” When I told Phil we could get $20-$25 million for his company he thought I was joking! “C’mon, this is all in my head!” His outside net worth was $1.2 million, consisting of his house and 401(k). He was 42 years old, married and two daughters in high school.

Phil hired us and in seven months we sold his business for $42 million; he rolled over 10% of the business with the buyer and obtained $37 million in cash. Now at 43 years old he still has the energy for his next thing. The joy for him is the building and creating – not caretaking. He’s getting a bit anxious looking for his next gig, but said he in no way does he regret selling his business: “If you had told me $10-$15 million, I wouldn’t have sold…but when you told me $20-$25 million, I thought it made sense to go down this road and secure my financial future.”

Phil took this risk off the table. It’s not that he doesn’t have other problems, but running out of money is no longer one of them.

Read the full article here by Larry Reinharz, Advisor Perspective

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