A few years ago, Chris walked into my office with a bad case of seller’s remorse. He had just sold his business, but feared he wouldn’t be able to do all the things he wanted to do with the rest of his life. While I was able to help him keep his dreams on course, he realized how much additional money would have been available to him had he taken a few simple steps a couple of years before he sold. Let’s take a look at what Chris could have done—and what you should do—to sell with more confidence and success.
Establish a relationship with a wealth advisor even if your assets are tied up in your business.
Chris didn’t seek financial advice before he sold his business because he invested all his spare assets in his business. He is certainly not alone. Many business owners and top executives have been known to have a concentrated amount of their savings invested in the company even after Enron and Bear Stearns sent shock waves from Wall Street to Main Street.
A wealth advisor can help provide a more objective point of view and a comprehensive approach to wealth accumulation and preservation. For example, a wealth advisor can help you focus on the long term, taking all your personal and business-related needs into consideration, including ways to transfer your wealth to your heirs and fulfill your charitable goals.
Create an investment policy statement for you and your business.
If you sail a yacht, you don’t grab hold of the helm without charts for your course. If you fly a plane, it can be dangerous to take off without a flight plan. And if you want your business to maintain financial integrity, it would be unwise to operate without an investment policy statement (IPS).
An IPS is a document used by large institutions, savvy investors and forward thinking business owners to establish investment objectives, investment management strategies and long-term goals for their personal portfolio and their business assets. If nothing else, it helps you take a deeper look at your current situation. A wealth advisor can work with you to document these considerations and implement a structured and verifiable process that can be applied to current and/or future investment decisions. Without an investment policy, in times of market turmoil, investors are often inclined to make impromptu decisions that are inconsistent with prudent investment management principles.
Imagine what you would like life to be like once you sell the company.
Chris didn’t know it at the time he sold his business, but he would learn how to fly a plane because, he says, “it looked challenging and fun and I had some time on my hands.” He also didn’t realize that it would take a while to disassociate himself from his company. “It took about a year for me to not think of myself as a CEO of a company,” he recalls. “After about a year it sunk in that my job wasn’t who I was. I was a father, a husband, a friend and I finally had the time to truly enjoy those positions.”
Other business owners may have even more ambitious goals once they sell their company. Some may want to start a new business venture, visit every major league baseball stadium in the country, or buy a vacation home—in Europe! Still others just want more time to hit the links or catch up on reading.
No doubt this event will be a major transition in your life. What would you look forward to doing if money and a lack of time were no longer obstacles? Write those thoughts down, discuss them with your wealth advisor and have a goal or two to start working toward. These aspirations can be used to create appropriate near- and long-term investment strategies.
Form a financial dream team.
As a successful business owner, you should have a lawyer, a CPA and a wealth advisor who not only work for you, but also work with each other for you. Together, they should focus on things that are most important to you. For most business owners, that includes their family, their business, the wealth they have accumulated and their philanthropic efforts. To address all four concerns successfully, it is often necessary for this team of advisors to work together.
By working together, they can familiarize themselves with the specific services they each provide to you and make sure their strategies complement each other’s. Most importantly, this synergy will give them the opportunity to help you make well-thought-out decisions and act on opportunities more quickly and effectively.
Then, when you get that first notion to sell your company, you have a well-oiled professional network to turn to. At that time, they will lend their particular expertise and help you assess the accurate value of your business, determine the tax and legal implications involved in the sale, explore whether your existing management team could support a buyout or if an outright sale would be more prudent.
Your wealth advisor’s goals should be as follows:
- Remain mindful of your evolving financial situation,
- Keep an eye on the industry/market your company is in to help you sell at an appropriate time, and
- Help determine if the proceeds from the sale and the investment strategies you put in place will be enough to help you accomplish those post-sale dreams.
Have an investment strategy in place for life after the sale.
After the excitement of selling your business wears off, the prospect of managing all that money may become daunting and intimidating. Your wealth advisor could prepare you for managing that large chunk of money you may receive. If you would like to live off it for the rest of your life, one strategy that may work for you is to divide your financial assets into three accounts that could house the funds you will need to pay bills, finance special expenses and grow your wealth. Here’s how it works:
Account A would hold fixed income investments that are relatively low risk and designed to generate income. Once you total up all your living expenses and consider your total wealth, you can determine which investment vehicles would be most appropriate. Essentially, you will live off the interest while leaving the principal alone.
Making your money grow to provide you with extra spending money requires a little more work. That money should be kept in account B.
Money in account B would be exposed to the financial markets and to systematic risks. These are common, cyclical market risks that are caused by the economy, fluctuating interest rates and bubbles in the stock market, for example.
It is this systematic risk that may cause growth stocks and value stocks to move in opposite directions. We can’t get rid of these risks. Instead, we manage them to generate a potential profit. How much of a profit or loss depends on how much your assets move in proportion to the market. We refer to this movement as beta. For the most part, benchmark investments may provide market returns potentially without exposing you to excessive risk above beta. Today you can find a comparable index for nearly every type of investment. There are indices for growth and value stocks, corporate and government bonds, commodities, real estate and hedge funds, to name a few.
Serious investors who want to outperform passive benchmarks and strive to grow their wealth should also put some money in a bucket that seeks alpha—higher potential returns without the higher risk. Knowing the origin of alpha may help you get a clearer understanding of the difference between that and beta. Prior to the advent of capital weighted equity indices, all returns were viewed as alpha. A stockbroker would buy and sell stocks based on his research. If a broker made you money, then you could say that he generated alpha. The S&P 500 Index would soon make it more difficult for this broker, because now he or she would have to show you returns in excess of the index.
Account C is where professional wealth advisors can use their insights and recommendations to generate alpha. This account would house assets that can stay invested for the next three to 10 years (a typical timeframe for an investment trend to play out). The objective here is for your wealth advisor to identify more sophisticated investments that may provide higher relative returns. He or she should also anticipate idiosyncratic risks that are specific to an asset or sector. If recognized early enough, unsystematic risks may be turned into buying opportunities.
Be the CEO of your personal finances.
You have worked tirelessly hard to grow your company. When you decide to sell, your wealth doesn’t have to stop growing. Properly invested, your assets can continue to provide for you, your family and your heirs. Also, make sure you give yourself plenty of time to prepare for a smooth and appropriate exit and surround yourself with a network of professionals familiar with your unique situation. Doing so will help you get the answers you want when it comes time for you to sell your business.
