Secrets of success in business succession planning

The number of small to medium enterprises (SME) in Australia means it is virtually commercially unsound to ignore those businesses’ need for succession planning (BSP) — the funding for much of which we would call ‘business insurance’.

Recently there seems to be a renewed debate being waged about the value of financial advisers offering this advice as well as personal insurance advice.

The pros run like this: easier to gain the client’s attention to the business needs in the first place; more premiums and, therefore, more revenue for the work involved, which can be just the same for personal advice (so why not earn much more from not much more work?); an easier sale when asking for the ‘business cheque’; better ongoing engagement and client commitment; and more lucrative review processes if the business is a successful and growing one. This list of pros is a strong argument.

The list of cons, however, seems to be not so much a list of strong realities but rather a list of perceptions, forming a belief system that often serves as a barrier to advisers.

Those who have made a success of their BSP activities have sufficiently overcome these perceived barriers to make this area of advice an important contribution to their bottom line.

Ask a roomful of advisers why they and/or their colleagues tend to shy away from advising on BSP and business insurances and the answers come very quickly and readily. I had the opportunity to witness and partake in this scenario recently, all around the country.

The most useful thing to do with such great insight is distil from it the underlying beliefs and then debunk them as myths, then create a series of apparent ‘secrets to success’ in BSP by taking the corollaries of all these beliefs and viewing them as positives.

Belief # 1: Only specialist advisers can handle BSP

That’s like saying only specialist investment advisers can handle margin lending or hedge funds. The client’s needs should dictate what the adviser handles, and there is no reason why any financial adviser authorised to give advice on life risk cannot handle the business insurance needs that arise from BSP.

What is correct as a belief, however, is that a life risk authorised adviser cannot give the specific tax advice associated with BSP, nor can they give the specific legal advice required to structure the shareholder or partnership agreements in line with the clients’ circumstances. There is, inherent in the relationship the adviser has with the client, a clear mandate to facilitate these areas of advice, being part of the overall task of BSP — the relationship skills of the life risk adviser makes them ideally placed to do this.

Belief # 2: It is too complex and difficult to learn

This is such an entrenched belief that it’s actually quite disturbing.

The reason can be sheeted home, I think, to the myriad of training sessions that drill down into the intricacies of the legal agreements and the policy ownership alternatives.

This style of training looks at not just the intent and the high-level methods of ensuring the certainty of benefit payment that the business owners need for their peace of mind. It examines the agreement structures and workings in some detail, the wordings of the put-and-call options, the precise structure of the trauma sunset clauses and all the alternatives for ownership. This being before an adviser has had a chance to get their head around how to approach these clients in the first instance.

Some sanity needs to prevail or there is no doubt that an adviser who is keen to work with motivated, successful, driven, intelligent clients (one of the clear benefits of this market demographic) will be deterred if that training is their only introduction to the knowledge and skills required for BSP.

In reality, this is an area of skills more than knowledge. There is a powerful and seriously important facilitation role that an adviser adopts when undertaking BSP advice. Beyond that, the knowledge levels are different but no more complex (and it’s arguable that they are more simplistic) than those for personal advice.

How can that be said? Well:

> The products (the most difficult knowledge area of all) are exactly the same for business and personal, with a few extra benefits on some products to help with the nature of the business need, such as forward underwriting.

> The needs analysis is much more straightforward than that for personal advice. How so? The calculations are limited to lump sum, clearly identifiable amounts in the majority of SME cases. There is not the multiplicity of concurrent needs, both income and lump sum, to be identified and extrapolated as in personal needs analysis.

> The knowledge of how to structure the legal agreement cannot be spoken about with the client under any adviser’s authority anyway, and, of course, an appropriately qualified lawyer must become involved to bring about the desired result in the form of the partnership/shareholder and buy/sell agreements.

> The knowledge of how to value the business and what if any capital gains tax (CGT) liabilities may arise, which will drive some of the needs analysis outcomes, cannot be spoken about in detail under an adviser’s authority either, and, of course, an appropriately qualified business accountant or business valuer should become involved to input client-acceptable figures into the equation for sums insured.

Getting the picture? The first secret to success, therefore, seems to be the ability and skill to engage the correct professionals in the process from the beginning and have them input at suitable touch points along the way. It then becomes their role, not the insurance adviser’s, to handle agreement structuring, policy ownership decisions and valuations of equity holdings and likely CGT.

This engagement of the right professionals is a skill not an intellectual exercise — ask any of the advisers who are successfully delivering results for their clients in this area. These advisers comfortably position the whole advice process in this light and manage the expectations of their SME clients from the first contact.

Belief # 3: Clients find the process too confusing and complex

That’s interesting. If you ask around you’d find that 95 per cent of business owners don’t have a clue what BSP is. So how can they have a perception of its complexity or otherwise? In research results from last year across small businesses, more than half of them didn’t even know what income protection was. That does not mean that they find it confusing!

So where does this perception come from? One guess: advisers themselves, and then those clients who have been subjected to a confusing presentation by an adviser who has not developed the skills to effectively position the concepts of smooth equity transfer after a crisis.

If ever there is an example of the KISS (keep it simple stupid) principle at work in the initial engagement stage with a client with business succession needs, it is the role of insurance funding in BSP.

There is really only one question a business owner needs to be asked to get the ball rolling, and it’s very straight forward: ‘Who do you want to own and run your part of your business when you are dead or unable to carry on yourself?’

If this question is asked around a table of business owners then the question becomes a reciprocal and rhetorical one.

Who of them would want to see an inexperienced spouse or, worse, a stranger or competitor come into the business they have spent so much time, blood, sweat and tears to build?

Once this is established as the key driver for planning funded exits, the rest is a downhill run.

The key is to distil the key driver and other drivers down to a questioning technique so the client is forced to envisage scenarios they have probably never thought of.

That, I feel, is where the perception clients find this confusing stems from: advisers can be tempted to launch into technical education-mode rather than positioning a client’s needs by referencing their emotional attachment to the business they have built.

Belief # 4: This business is too hard to get underwritten

As a bald statement, that is probably not too far from the truth — but why is that?

It is the sums insured that cause the intense attention to the underwriting process, not the fact that the reason for the policies is BSP. If policies for the same quantum were being written for personal reasons then there would be just as many underwriting requirements.

Ask any underwriter and they will tell you that in practice it is probably easier to get a large business case underwritten than the same size of personal case. Why? Because the financial evidence is usually far easier to establish and furnish to the underwriter’s satisfaction for business insurance than for personal insurance.

The medical requirements simply reflect the quantum, not the underlying purpose. So this is the same for personal and business cases, unless (and here’s the exception) forward underwriting is being applied for. Then in order to avoid the impost of future medical underwriting as the business’ value increases, the medical requirements for higher sums insured are simply obtained and underwritten in advance.

Belief # 5: This business is too much work to bother doing

Well it depends on what your hourly rate is. Yes, it can take a long time and most certainly there will be several meetings with business partners.

I often wonder how many advisers who make blanket statements about how much work is involved in doing life risk insurance in general, let alone BSP and related insurance, have actually calculated their hourly rate and then equate the earnings from the life risk business back to that hourly rate.

In most cases it would be safe to guess that a good insurance client, even more so a good business insurance client, yields a very healthy hourly rate in return for the time spent. Granted, there are the odd cases that stretch the average, but that’s the 80/20 rule at play.

Business insurances yield very well in the revenue stakes simply due to their premium size. This means that the hard work and long hours per client are being appropriately rewarded in most cases.

And of course, the more big cases you have the fewer new clients you need to find.

Belief # 6: This business takes too long to complete and I wait too long to be paid

Well, yes, these premiums are often much higher than those for personal insurances, so the whole process is commensurately more detailed. But once there are a few in the pipeline, how much does it matter if it takes a while to get paid? That argument only washes in the beginning when the first one is written — after that, it’s a continuous production line.

Reverse all these beliefs and you have the secrets to success in BSP.

Sue Laing is the managing director of the risk store. E-mail: [email protected]