SME owners can struggle to even think of what their business might do without them, but Michael Aziz believes advisors can help
Michael Aziz sees a common story among Canadian entrepreneurs. Business owners, often founders, who have worked day in and day out to establish a successful operation, be it a grocery store, an auto body shop, or a shipping company, who haven’t been able to plan for the long-term. Aziz is the Chief Distribution Officer for Canada at Foresters Financial, and he’s seen instances where small business owners are so bogged down in the day to day operations of their business that they fail to plan for what might happen without them there.
Aziz believes that these owners’ financial advisors can help them prepare. He explained the role of solid financial planning in helping to get owners to consider the future of their businesses beyond themselves. He outlined, too, how insurance products like critical illness and whole life coverage can help offer tax efficient safeguards against the unexpected while laying the groundwork for a more fulsome planned succession.
“I believe a lot of small business owners don't think that far ahead. I think maybe when they're in their late sixties they think it's time for me to transition out a year, they're giving it thought. But usually by then you will have missed out on some great opportunities to help you to transition the business more efficiently,” Aziz says. “You’ve got to start planning ahead of time. You need to determine what the role of insurance of insurance is, what the role of key person will be.”
Aziz has even seen these succession crises occur in financial advisory practices. Despite the work these advisors do helping to plan for their clients, they end up without a meaningful succession plan for the sale of their book. When something unexpected occurs, an illness or a death that forces the sudden liquidation of that practice, the price ends up being far less advantageous than it could or should be.
While many SME owners might lack plans for succession, there has been a growing trend of private equity buyers and search funds buying enterprises at or below the $5 million EBITDA mark. While this could be a boon for business sellers, Aziz says that these buyers can end up creating something of a false sense of security among owners. Often those buyers are interested in very specific industries, or the sale process could result in a lower valuation than the owner would prefer. Aziz also notes that for SME owners, their businesses go beyond dollars and cents. They represent legacy, relationships with employees, and a role in the community. He believes that succession plans need to include those factors rather than just focusing on sales figures.
For advisors, opening up the conversation about something so emotionally charged as a business transition can be challenging. Aziz sees insurance as an entry to that conversation. Talking about how to leverage a CDA notional account, for instance, can help an advisor talk to their client about the eventual value of their business upon succession. They can use different insurance products like critical illness and life insurance to talk about wider plans for the business in the event of having to trigger insurance coverage.
Critical illness, he explains, can open up a discussion of what the business looks like without the owner there, even if it’s only for a medium-term stretch of time. That can help drive a conversation about what their absence would mean for the business over the longer-term. Whole life insurance can open conversations about funding retirement, as well as retirement goals and lifestyles which inherently preferences a wider conversation about succession.
For advisors with SME owner clients, Aziz believes that these insurance conversations can help open the door to more difficult topics that need to be resolved before a crisis forces their resolution. He argues that as advisors look to open up these topics, keeping a view towards their own education is key as well.
“if you want to be working with small business owners, you have to be knowledgeable. You have to know tax codes, you have to know corporate structures between a hold co and an operating co. So you have to keep yourself educated,” Aziz says. “Get your designations, get your CFP, get your CLU, attend events held by industry partners and insurance companies which will educate you. Make sure you partner up with, I would say, experts in each field because you've got to be very careful on how you give advice.”
