The sale of a business or a recapitalization can often elevate an entrepreneur to a dramatically higher level of wealth. This transition creates a new set of opportunities for you as a business owner, as well as some challenges that need to be addressed.
Completing a transaction involves a significant amount of planning and effort by you and your team of advisors. But what happens once a transaction has been closed and the proceeds have been received? Then, it is time to shift your attention to managing your wealth in a way that allows you to achieve your goals.
Planning Ahead to Post-Transaction
After a transaction closes, one of the biggest priorities you face is using the proceeds to create a diversified portfolio that generates a “paycheck” that will support your lifestyle needs and provide adequate growth. If you still have an equity stake in the company, your asset allocation should account for this concentrated equity exposure. If the transaction has an earn-out component, the range of potential cash flows generated by the earn-out needs to be forecasted and factored into the liquidity planning. Depending on the timing of a close, there may be an opportunity to generate some interest on the amount earmarked for taxes. Your planning also needs to account for any large one-time purchases you wish to make soon after the transaction.
Assessing New Investment Opportunities
When you reach the next level of wealth, you may have more opportunities to invest in institutional-level asset classes, such as private equity, venture capital, real estate, or investing directly in start-up businesses. Relative to traditional asset classes, these alternative investments are much less liquid and require a more rigorous level of due diligence and tax planning. Similarly, at larger asset levels, pre-packaged investment products, including mutual funds, may be less desirable relative to customized portfolios of securities, which offer improved tax efficiency and lower expenses.
Managing Greater Personal Risk
In addition to increasing your family’s net worth, a large liquidity event may also increase your family’s risk profile. After a transaction, you should conduct a comprehensive review of your insurance policies to ensure that the coverage, particularly in terms of liability, aligns with your new financial position. You should also review and enhance your personal security and cybersecurity protocols because a high-profile transaction may make your family more vulnerable to identity theft and other crimes. Conversely, certain insurance coverage, including life insurance policies, may no longer be needed due to the net proceeds from the transaction.
Choosing the Right Advisor to Help You Manage Personal Wealth
The vast majority of business owners already have an established relationship with a financial advisor by the time a transaction occurs. In many cases, however, the wealth-management, risk-management, and tax-management considerations that come with a major liquidity event require a higher level of sophistication and the ability to take a comprehensive view of your total wealth profile. It may be beneficial to work with a wealth advisor who can coordinate the efforts of your tax, legal, and insurance advisors. It is also important to seek the counsel of an advisor who has experience working with business owners to help them navigate the many decisions that go into managing the wealth generated by a liquidity event.