Financial advisors frequently develop niche practices for doctors, attorneys and engineers, but another group of highly trained professionals is rarely on their radar. We’re referring to skilled tradespeople (including plumbers, electricians, custom homebuilders and general contractors) who often own very lucrative businesses.
A big reason they’re often overlooked is because they tend to keep all their wealth in their businesses and don’t have much in investible assets, says financial advisor Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group, headquartered in Newport, Ore. Another reason is that “industrial arts entrepreneurs,” as she refers to them, are unlikely to go knocking on advisors’ doors.
“These are a lot of the businesses that need the most help but they may not know that,” says Carlson, who works with many small business owners. Industrial arts entrepreneurs are an important part of the economic fabric in rural Oregon, where her firm has multiple offices. Most of her business owner clients are in the industrial arts field. She also serves commercial fisherman, who are typically “solopreneurs” with different planning needs.
Over the past year, Carlson and her colleagues have done exit planning for drywall, plumbing, sheet metal and construction companies. Clients often come through word of mouth and she advertises a lot on social media, she says. Her clients who own the drywall company were connected to her through Ramsey SmartVestor Pro, a free service that matches people with investment professionals and is owned by national syndicated radio talk show host Dave Ramsey.
Carlson’s husband, a custom homebuilder and general contractor, has also referred a lot of business to her over the years.
“I know my husband’s business intimately, so it’s really helped me have an advantage when helping these other entrepreneurs that are really good at what they do — they’re either a really good plumber or they do drywall great,” she says, “but they don’t have the aptitude or the even desire to want to learn about the finances and exiting their business.”
She’s not casting judgment; she knows they’re busy out on jobs and they usually don’t have business educations. “Most of these people finish high school, and that’s it, so they don’t have the knowledge,” she says, “unless they’ve gone and really developed that within themselves — and most haven’t — to understand how the business works.” Instead, they delegate their CPAs to read their profit-and-loss statements and balance sheets and to do their quarterlies.
The problem, from what she has observed, is that CPAs are often “reactive and under the gun,” through no fault of their own, Often, “they are only operating on the information the business owner gives them,” she says, “which is usually at the very last minute.”
Without anyone helping them with planning, industrial arts entrepreneurs, like many other small business owners, often invest everything back into their businesses and don’t really give any thought to how they can build wealth that can sustain them in their retirement years, says Carlson.
“They’re not thinking ahead, they’re thinking month to month,” she says. Sometimes they haven’t even set up a retirement plan. What she tells them, she says, is “Let’s take a pause. You didn’t go into business to never build a financial future for yourself or you didn’t go into business for making everyone else wealthy.”
She teaches her clients how they can start building a plan for their future that’ll enable them to still make their businesses successful, but also enable them to start using the business to build wealth outside of their business, she says.
Carlson, who holds the certified exit planner designation (CExP) from the Business Enterprise Institute (BEI) and has long helped her retirement plan clients and her personal financial planning clients figure out their exit strategies and other business-related needs. In 2019, she launched Freedom Business Builder, a consulting program, to bring these types of services to a broader swath of business owners.
The program consists of six different components: assessment and discovery, exit planning, proactive tax strategy, corporate structure, retirement plan, and team and leadership development. She also offers ongoing coaching and consulting. The components are priced and billed separately; all in, it costs about $12,000 over six months, based on an hourly rate of $300.
“If I said, ‘Hey, it’s going to cost you $12,000,’ they’d be like, ‘Okay, see you later. I don’t have that money,’” she said, noting they’re more amenable to taking baby steps. The program is open to all business owner clients, although typically their revenue is at least $1 million.
Carlson can’t emphasize enough how important it is to have good exit planning. In many cases, “The knowhow and the intellectual capital is all in the owner’s head,” she says, “and so if they died, the business would be gone.”
Interest in her business planning services “took on a life of its own,” she says, as COVID-19 made people stop to consider what they want and what’s important. “I think 2020 was a year where these business owners really took inventory and said, ‘Do I want to continue on,’ or ‘I gotta have an exit plan for this,’” she said. “We have found that a lot of business owners are kind of overwhelmed and tired out and up in arms.” As they start reopening from pandemic lockdowns, they’re trying to decide how to move forward, she says.
While many businesses are failing around the nation, the owners of a lot of construction companies in Oregon are “having the best year that a lot of them have had in their business career,” says Carlson, “because more people are home and they’re investing in their homes.” It has also helped that construction has been considered an essential business in Oregon so construction companies there didn’t have to shut down, she said.
But one problem in some industrial arts and other businesses, she says, is they can experience feast or famine depending on the economic climate, so owners need to have flexibility in their plans.
Carlson’s first experience in active planning for business owners was in 2010 when she helped her husband buy his construction business from his father. “My father-in-law is a man of few words,” she said, and that’s common for business owners. “Most of these business owners haven’t had these conversations with even their spouse,” she adds, and she gets both spouses involved when she can.
In addition to educating clients, advisors must also implement a lot of soft skills because business owners typically have strong psychological connections and emotional feelings regarding their businesses that they must come to terms with and incorporate into their decision-making.
Often, “those soft skills are what’s critical and what allow a client to come along on the journey,” she said. It’s not a quick deal, she says, but a process that requires a lot of consulting and coaching.
Carlson’s clients who own the drywall company, a husband and wife in their 70s, don’t have any children and their business “was their child they had given their life to for the last 40 years,” she says.
They had tried several years ago, unsuccessfully, to sell their business through a business broker. After meeting with Carlson, they ultimately decided they wanted to sell their company to a long-time key employee “who was important in the business and knew the business,” she says. The problem was he had no resources, was recently divorced and had some life issues, she said. That’s not unusual. Generally, key employees are not in a position to have the money to buy the business they work for, she says.
Carlson helped the couple come up with a two-year plan in which they would sell 49% of their business the first year (phase one) and 51% of the business next year (phase two). The successor would receive 49% of the net profits that first year, half of which would go back as payment to the owners who were exiting and selling their business.
She prefers that successors don’t acquire more than 50% ownership of a company during phase one because they’ll have to pay estimated taxes out of those profits. She would rather they experience receiving the profits and having increased cash flow, she says.
When a business owner plans to have a child be the successor, “we get in there and get to know the kid,” says Carlson. Her clients who own the sheet metal company are a “little leery” of their son, she says, because they think he hasn’t shown very much financial responsibility. The parents made it clear “they didn’t want to be the babysitter,” she says. “They didn’t want to be involved in making sure that he was doing his quarterlies.” So she built into the plan that she, as the planner, and her clients’ CPA would be the ones holding the son accountable, she says.
Carlson has also helped clients implement gifting strategies when their children are buying into the business. And with every succession plan, family or not, she implements an exit strategy in case phase one doesn’t work out, she says.
In the two years since she launched Freedom Business Builder, “We haven’t had anyone blow up their plan,” she says, “so that’s good.”
Jerilyn Klein is editorial director of Rethinking65.