What is “Holistic” Planning?

Some financial planners use the term “holistic planning”. It’s meant to indicate that they consider the client’s short-term and long-term life goals and how the client visualizes their future. Holistic Wealth Planning is continuous and considers multiple aspects of a client’s life objectives.

The Valuation Reality Gap

Only one of those aspects is ownership of a business. This raises the question, If a typical business owner has 50% of their net worth in a business, is it really just one equal piece of their planning?  Of course not, but there is an uncomfortable truth about financial planning for business owners.  Unfortunately, many untrained financial planners use a value for the business that is provided to them by the client. Unfortunately, most business advisors estimate that the average owner’s impression of their company’s value is at least 35% too high.

If an owner is planning on a $3,000,000 nest egg in retirement. And he estimates that $1,500,000 will come from the net proceeds (after paying capital gains tax on the $2,000,000 from the business sale).  But 90% of businesses that size are sold on an asset basis. That could bump the tax rate from under 25% to something closer to 40%. On top of that if he has overvalued by the value by 35%, a $1,300,000 sale would result with only $780,000 of net proceeds.

Impact on Retirement Goals

Now his nest egg is $720,000 short of goal. Retiring on $2.3 million isn’t exactly poverty, but it would require substantial changes to the anticipated goals. That is why financial planning for business owners can’t be holistic if it doesn’t include the value of their business. That value should be confirmed by a third party.

Exit planning is the critical final component of a business owner’s wealth strategy. A business requires different tax strategies, risk management and timing assumptions. Even an appraised value can range widely between different transition strategies.

Holistic Planning in Exit Considerations

How is estate planning affected by the disposal of the business? Does it employ one or more children? What about those children not in the business? How can the business value in the estate be balanced between fair and equal?  Will the business be sold to a third party, or as part of a management buyout or ESOP? The proceeds may be realized all at once, or over a longer period of time. Is there value for any real estate involved? (A new owner may or may not wish to purchase the property.)

Holistic planning for a business owner is far more complex than for an employed individual. It’s almost like having a second client in the room. If the planning doesn’t consider the myriad of complexities surrounding monetization of an illiquid asset (the company), it may not be considering the biggest single factor in that client’s financial future.