Exiting a business can be exhilarating, exciting, and downright scary. As wealth advisors, we often encounter a series of common questions from clients planning for this major life (and financial) transition. In this blog post, we’ll address these questions and provide strategies to help entrepreneurs navigate their newfound wealth, ensuring long-term financial security and peace of mind.
1. Will I Have Enough?
Addressing the Fear of Running Out of Money
Whether your company sells for $1 million or $50 million, the fear of running out of money is universal. This fear may seem irrational on the surface, but it’s the number one question we encounter, regardless of the transaction size. After all, this is likely the largest transaction of your life, and for most owners, the business represented the largest portion of your net worth. A CERTIFIED FINANCIAL PLANNER™ professional can help alleviate this fear by creating a cash flow analysis and developing a spending plan.
2. How Can I Replace My Income?
Creating Consistent Income Post-Exit
No matter the size of your exit, transitioning from a stable paycheck and periodic owner distributions to a one-time lump sum can be unsettling.
The trick lies in creating “mailbox money”— developing and monitoring a portfolio of assets that generates consistent income which mimics the stable paycheck owners have grown accustomed to. This provides both psychological comfort and financial stability.
3. Do I Have to Invest in Stocks?
Overcoming Stock Market Anxiety
Investing in publicly traded stocks or stock funds can feel scary, especially for entrepreneurs used to controlling the outcomes of their own businesses. Consider asset allocation—diversifying broadly across various investment vehicles. A globally diversified portfolio of stocks has historically delivered attractive long-term inflation-beating growth. If you plan on living for 20+ years post-exit you’re going to want some growth in your portfolio to help you maintain your lifestyle and/or increase your legacy.
Pairing stocks with a diversified bond portfolio can lower portfolio volatility and deliver consistent income.
Stock investing becomes much easier when you follow a disciplined plan and keep a long-term mindset. Part of that plan generally means holding at least two years’ worth of living expenses in cash investments or short-term US treasuries. This can give stock investors added confidence to stay the course during normal market pullbacks and prevent behavioral mistakes that detract from long-term returns.
4. Should I Hire an Advisor or Go It Alone?
Navigating the Advisor Landscape
Engaging a CFP® professional for pre-exit planning can give you crucial perspective on your deal. What is the true value of your net proceeds? How much can you reasonably spend the rest of your life? What investment options are available to high-net worth investors like you? What portfolio of assets will you use to generate your target income? And how will this transition impact your tax and estate plan?
Post-exit, consider if you’re a delegator and if you can build trust in an advisor. An advisor can act as a guide, helping you navigate safely through the transition, update your plan as circumstances change, and build an investment strategy to meet your goals. It’s nice to have a partner with a professional perspective on your complete financial picture.
Finding the right advisor can be challenging for entrepreneurs so we created a guide:
10 Questions to Ask Before Hiring a Wealth Advisor
5. Should I Buy Real Estate?
Exploring Real Estate Opportunities
Real estate can be an incredible wealth building tool and income generator. There are also some significant tax advantages to owning real estate.
Many entrepreneurs own the real estate upon which they operate their business.
Consider additional real estate if you have an edge or deep interest AND you’re willing to be somewhat active. Owning several properties (or “doors”) can be profitable but typically requires active involvement, even with a property manager. Consider how involved you want to be in the day-to-day management of your investments.
You must also be prepared for illiquidity and challenging market cycles. Despite a 12-year bull run in real estate, downturns can occur.
6. How Do I Pay as Little in Taxes as Possible?
Minimizing Tax Liabilities
Important tax planning must be done BEFORE you exit. Understand the implications of your corporate structure. Explore if it makes sense to gift shares pre-exit outside your estate to family members or charity. If you’re in a high-tax state, many consider legally establishing residence in a no-tax state (this is possible but not as easy as it sounds). Will you be investing in a Qualified Opportunity Zone to defer capital gains taxes, possibly indefinitely? How will your new investment income be treated for tax?
Having a coordinated strategy between a tax advisor, legal counsel, and financial advisor is a powerful combination.
7. Should I be investing in Alternative Investments such as Hedge Funds, Angel Investing, Venture Funds, or Private Equity/Credit?
Exploring Entrepreneurial Investments
As an entrepreneur at heart, you’re probably drawn to these types of investments.
There can be attractive potential returns in alternatives, but substantial risks as well. These are generally very opaque, risky, and illiquid investments.
It’s important to build a fortress balance sheet first. That means you have plenty of liquidity in traditional asset classes such as stocks, bonds, and cash.
Investments in some alternative investments can be locked up for 10 years or more. With the potential for attractive returns there’s also the risk of permanent capital loss.
Here, sizing your investment appropriately is critical. Keep in mind, if selling your company to a private equity firm, you'll very likely be required to retain a significant portion of the sale in the acquiring company. Alternatives are not for everyone but may ultimately make up 10 to 20% of a high-risk investor’s total portfolio.
You’ve won the game, let’s not put your entire financial success at risk trying to chase a little extra return.
8. How Fast Should I Deploy this Capital?
Avoiding Rushed Decisions
Post-sale, take your time making investment allocation decisions. You really don’t have to make all your long-term decisions at once. Business exits are not only big financial transitions but they’re incredibly emotional personal transitions as well. Be kind to yourself.
Parking cash in a money market fund or short-term treasury for a bit is much more attractive than it was just two years ago. This can give you some breathing room to make a solid plan and execute toward your specific goals.
The Bottom Line
If you’re thinking about an exit, the time to start planning is yesterday! Part of that planning will be building an elite team: Tax Planner (may not be your regular CPA), Wealth Advisor/CFP® professional, and M&A attorney. Make sure your team is filled with credentialed all-stars that will be communicating and strategizing on your behalf.
Spending some money here can potentially save you millions post-exit.
With enough time to plan, you can have solid answers to these questions even before you get your first LOI. That can give you confidence in the negotiation process and assurance to enter your new post-exit reality.
Then, after successfully executing your sale you’ll be ready to build a plan to attack the life you’ve been dreaming of with clarity and confidence.
Happy planning,
Brian