I recently chatted with an independent financial planner. During our conversation he indicated that his practice had a fairly high percentage of family business owners. We communed about our varying roles in representing these clients and how similar our initial interviews could be. We both ask about the business assets and values and then shift to other assets like real estate and retirement. What we would commonly hear from the prospective client was “My business is my retirement” or “The building housing my business is my retirement.” The gentleman I was chatting with is much younger than me, but I started to recite my liturgy of “certain” investments that never made it to the retirement finish line. Blockbuster Video; Gino’s Burger & Chicken; Rexall and Rite-Aid; Sport’s Authority; Forever 21; Tom McAn Shoes; Today’s Man. Radio Shack; Circuit City. You get the point. These were once viable businesses. But, we live in a day when many businesses expand beyond their capacity to grow while others lose their niche. If you have been reading recent business columns, there is a lot of chatter about whether car dealerships have a future.
Another wrinkle we have is the fact that artificial intelligence is here and threatening to do to nearly every business what the steam engine did to people who owned a waterwheel by a fast moving stream 150 years ago. The stream became irrelevant to the mill except when the steam engine failed. Lots of business owners today are evaluating what AI can do for them. But are they also examining what AI could do to them? The other electronic animal out there that seems to be making inroads into the manufacturer’s lunch is the 3D printer. These technologies are moving fast in the world of “market share.” In the early days of steam, the engine failed a lot and occasionally exploded, taking the factory or mill with it. But, over time, the technology kept getting better and the failure rate disappeared. AI and 3D are likely to do the same.
I sit on a board with a person who produces high school and college yearbooks. Today, people still want physical books, but I would bet that with each passing year, the subscription rate declines among the graduates. Last year, I spoke with a radiologist who informed me that he wouldn’t leave AI technology alone in the lab but it was able to produce highly accurate studies. These are two fields where people would have thought human insight and physical production would have always been required.
In 1982 the arrival of a reliable and inexpensive ($5,000) personal computer began a technological march that has left many businesses either gutted or clinging to a niche part of a market that was once grand in scale and profits. Last week the magazine Black Enterprise wrote about a McKinsey study concluding that $5T(rillion) of small businesses were about to change hands as Baby Boomers retire. True enough on the market side, but the question that must be asked in these transactions is simple: what is the likelihood of sustainable profit on a “going forward” basis. Business valuation is premised on the future, not the past. And our friend Mr. Shakespeare may not be as accurate as he once was in saying that “Past is prologue.”
The conclusion has to be that any estate or wealth plan needs to be built around diversified savings and retirement plans and not just a business enterprise. A little more than a century ago Philadelphia had more than 450 companies making clothing. It was one of the world’s leading metal fabricators, with one company employing 19,000 men making eight locomotives a day. The owners of those businesses thought their ingenuity and energy could produce reliable income for generations. Time has shown them to have erred.
The ‘Great Wealth Transfer’: A $3 trillion opportunity for Black business owners is on the horizon