Owners of closely held businesses demand a full skill set from their financial advisors. These clients have their personal and business lives uniquely intertwined. Add to that the high concentration of wealth in an illiquid asset, and the tax, legal, investment and personal issues become a challenge to unwind.The No. 1 driver of financial plans for this group of clients is succession planning. All the planning issues come into play in the decision of how and when to leave the company the client has built, and in whose hands to leave it. But the owner needs to consider both the personal side of the transition and the need to create income from the illiquid asset.

"The most problematic issue business owners spend time on or wish would go away is how to transition out of the company," said Mark Balasa, CPA, CFP, of Balasa Dinverno & Foltz LLC, in Itasca, Ill. "We start pushing and probing with even 40-year-old clients about what their goals are for leaving."

Early planning is important for all possible exit strategies.

If the business goes to the employees, they need time to find financing. If the next owners are family members, myriad psychological as well as financial issues have to be addressed. Even if the business goes to outside investors, the process can take years.

"Owners need to be emotionally and financially ready to transition," said Balasa. "Even in an outright sale, it could take five years to groom managers to be salable, and another five years for the new owners to fully pay off their purchase."

Selling to outside investors brings other challenges. The new owners will want to have a say in how the business is run, challenging both the previous owner and the long-time employees. "Sellers have to think ahead when someone outside the company buys in," said Philip Tilton, CPA, JD and a partner with Briggs and Morgan PA, in Minneapolis, who works with many closely held businesses, partnerships and limited liability corporations.

Employee sales require the early grooming of key company personnel. "The problem with many business owners is that they've put a fair amount of capital into the business," said Tilton. "Younger people today don't seem as interested in putting up large sums of their own money to fund a buy."

Financing for private companies is more complicated than public company financing, sometimes because of the tax requirements of S corporations. Tilton finds a solution in an employee stock option plan funded with a bank loan. The stock is held in the trust and the employees pay off the loan over time. "The ESOP is a relatively painless way to let employees buy the company step by step, day by day," Tilton said. "The plan allows for an orderly transition as the employees gradually build up equity."

A "softer" side of advising comes into play when the new owners will be the children. Selecting the right heir and grooming the new owner and senior management requires vision, planning and open communication.

"An advisor has to look at the business environment and help choose the criteria for the successor," said Peggy Hollander, managing director at The Succession Group, in Coral Gables, Fla. "I tell my clients that the planning process is challenging, but the worst planning is that done by default."

Open communication is critical for passing on values to the next generation. Family values such as an expected work ethic or handling of extended family relationships form part of the conversation. Views about the business' role in the community are just as important.

"Many family-owned businesses are closely involved with the communities they serve," said Hollander. "The new generation might add technology or new techniques to the running of the operation, but a tradition of quality customer service would be important to pass on."

Coordinating the pieces usually means pulling together a team. While most business owners depend on expert tax and legal skills to build their businesses, at the point of sale the planning picture gets bigger.

"The biggest concern of business owners is how to integrate their personal financial planning with planning for the business," Tilton said.

An awareness of the need for overall planning is growing among the owner's other advisors. "We're being told now within our law firm not to make changes to any buy/sell agreements or other corporate documents without checking to see how the change might impact the owner's personal finances," said Tilton.

Proposed changes to professional standards regarding business valuations put extra focus on the team approach. Early last year, the American Institute of CPAs proposed a standard for business valuations, which stated that "performing a valuation engagement involves special knowledge and skill." The valuation of the business is a critical piece of the retirement planning for a business owner, and the new standard may mean that an expert in valuations joins the team.

Business owners present challenges as investment clients as well. Entrepreneurs are used to making decisions on their own. They often hold the belief that they can control things. "When things go down in the market, the first thing they want to do is take action and change," said Clark M. Blackman, CPA/PFS, of Alpha Wealth Strategies, in Kingwood, Texas, among whose clients are several retiring and retired business owners. "I have to make it very clear up front that equities will go down and we will stay committed to a long-term plan. If they want a market timer, I politely tell them they'll have to go somewhere else."

The good news for advisors working with owners of closely held businesses is that these clients are used to the planning process. Getting started early with an integrated plan could seem a familiar extension of their natural inclinations.

"Business owners are used to planning," said Blackman. "They've reached their success by having a good long-term strategy and keeping to it."

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