BV Benefit #2 - Wealth Management

The second benefit of having a professional business valuation is its use in wealth management.

The value of a business can represent the largest portion of a business owner’s wealth. According to a publication by Mercer Capital:

"About 75% of all private equity is owned by households for whom it constitutes at least half of their total net worth. Households with entrepreneurial equity invest on average more than 70% of their private holdings in a single private company in which they have an active management interest." [1]

Wealth managers typically focus on managing liquid investments (e.g. publicly traded securities).   Investors pay substantial fees for the services of wealth managers, typically based on a percentage of the value of the assets under administration (e.g. 0.5% to 2.0% or more).   Monthly, quarterly or annual statements indicating the value of these publicly traded investments are provided so that appropriate investment decisions can be made based on, among other things, how values have changed and what returns are being generated.

Privately held business owners spend significant time managing the business.   Many, however, spend little time managing the wealth associated with their business.   A business investment is just as important as (if not more important than) publicly traded investments.   An effective wealth management strategy allocates a percentage of the value of the business to managing the privately held wealth.

The One Percent Solution recommends that privately held business owners invest 1% to 2% of the value of the business towards a budget for the following wealth management activities:

1. Annual business valuation


2. Reviewing the buy-sell clause and shareholder agreement


3. Funding life insurance


4. Tax and estate planning


5. Monitoring critical success factors and value drivers


6. Audited financial statements


7. Annual legal review


8. Other pre-sale planning projects

These activities may not be required every year but each of these should be carefully considered and incorporated into an overall wealth management plan.

All business owners will one day exit their business.   The above activities will help ensure that business owners maximize the net proceeds they receive when it comes time to convert their business into a liquid asset.

Traditional wealth management has focussed on the liquid investment portfolio despite the fact that this may account for a small portion of the business owner’s overall wealth. It is time for business owners to protect their family’s wealth by restoring balance and order to their overall wealth management plans.   Start with a business valuation to identify what percentage of the overall wealth is tied up in the business.

Stay tuned for further discussions on the many other uses of a business valuation.

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1.   Source:  The One Percent Solution, Z. Christopher Mercer, 2007.