From finances to family, here are the steps to take
One mantra by which entrepreneurs often live is “always run your business like it’s for sale.” This mindset brings discipline and operational efficiencies to the day-to-day management of your company by focusing on what drives value creation. In truth, though, there is always the chance that you may one day reach that point, whether it’s due to succession planning or family issues, market timing, or receiving an offer that’s simply too good to refuse.
Balentine is a firm of entrepreneurs, just like many of the clients we serve. From our own experience and through years of working with clients in similar circumstances, we know that growing and developing a business to the point of a liquidity event is an incredible entrepreneurial feat. We understand the psychology surrounding these events—you’re likely to experience myriad emotions, ranging from elation all the way to fear.
As a business owner, your company is likely both your purpose and your identity. You’ve sacrificed and worked exhaustively for years—maybe even decades—to get to this point, investing significant amounts of both emotional and financial capital in your business. It’s scary to think about waking up the day after the sale and having no idea what you’re going to do with the rest of your days. The best way to combat this uncertainty is to recognize that the liquidity event will bring significant changes to both you and your family, and to plan for it.
There are several steps we suggest newly liquid entrepreneurs take to smooth the transition:
- Assemble your team. The skills required to build a successful company are often quite different from those required to successfully sell a company and manage the proceeds. Just as you did when you grew your company, focus on building a team of professionals who can support you through this process. Do you have any peers who have sold a business? Chances are they’ll be able to recommend a variety of professionals, including accountants, lawyers, investment advisors, and investment bankers. We can’t stress enough how important it is to assemble your team before making any major decisions. We have found that clients who engage us earlier in the process are far more likely to achieve their goals because they have a wider array of options available to them pre-sale. Additionally, be sure to appoint a team coordinator. Balentine often serves in this quarterback role, communicating with each team member as the process unfolds.
- Pre-plan. Although it may be tempting to respond to an unsolicited bid, often the best advice is to run a process, ensuring that your business is shopped to both financial and strategic buyers. Before signing a letter of intent (LOI), take advantage of planning techniques such as intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), valuation discounts and transfer mechanisms. The law in this area is quickly evolving, so it’s best to consult with your estate planning attorney for the latest best practices. This is also the time to think about charitable planning and domicile (i.e., your legal residence for tax purposes).
- Don’t rush. For most entrepreneurs, investing the proceeds of one’s life work is uncharted territory. Take the time to think things through and resist the urge to immediately deploy the proceeds. We’re reminded of the newly liquid entrepreneur who quipped, “My money is burning a hole in my broker’s pocket!”
- Secure your money. Find a secure custodial home and investment structure for your proceeds. When it comes to an investment strategy, focus on safety and risk mitigation first. After all, you don’t have to take a lot of risk to become wealthy, you already are! Liquidity and yield are also important considerations, as you will likely need to replace income from the business with investment income to sustain your lifestyle. Only after you have minimized risk by diversifying your portfolio and ensured easy access to your assets by maintaining an appropriate amount of liquidity should you then begin to think about growing those assets. While cash doesn’t generate too much these days, there are several safe, yet yield-generating options that may be beneficial to consider until you find a permanent home for the proceeds; examples include short-term bond funds and money market funds. Consider this—if the sale of a business netted you $25 million, an extra .50% is more than $10k in interest per month. That’s not chump change!
- Prepare for taxes. More than 200 years ago, Benjamin Franklin reportedly stated, “Nothing can be said to be certain, except death and taxes.” Selling a business can lead to significant payments to Uncle Sam in the form of taxes on profits, so it is crucial to plan accordingly. Several options exist that balance safety, liquidity, and yield, including money markets, certificates of deposit (CDs), bank deposit sweep programs, and ultra-short bonds maturing prior to your tax payment deadline. At Balentine, we work with each client to ensure that they understand the benefits and tradeoffs of each option. Your team can also assist in finding creative ways to reduce your tax payment, such as the following:
a. Capturing unrealized losses in your investment portfolio.
b. Deferring income into another tax year. Depending on the structure and timing of your closing, you may be able to spread your proceeds over multiple years.
c. Utilizing income tax deductions, such as charitable gifts to qualified organizations.
- Review your insurance. This liquidity event may mean the end of your employer-sponsored health insurance, life insurance, etc. If so, start researching new options as soon as possible to prevent a gap in coverage. This is also a good time to double check the level of your life insurance coverage to determine if changes are warranted.
- Legacy Planning. How do you want to be remembered, both by family and more broadly? Many entrepreneurs choose to share their lessons learned in a book or by memorializing values in a letter. How do you want to educate your family about your newfound wealth? If the sale nets enough liquidity to significantly elevate your family’s socioeconomic status and lifestyle, consider talking to a child psychologist about the best way to share this news with younger children. With all the information available online today, you should be the one to control how and when your children learn of this event. Finally, how do you want to approach philanthropy? Determining how to most efficiently give money away can sometimes take as much effort as it did to earn that money.
It’s also important to think about the people who helped you get to where you are today. After all, no person is an island. One entrepreneurial client flew around the country handing out $10,000 checks to long-time employees after the sale of his company as a sign of appreciation for their hard work.
Remember, too, that this is a lifestyle change for your entire family. One business owner traveled heavily throughout his life, leaving his wife to essentially become the CEO of the household. Suddenly, with the sale of his company, he was home a lot more. Two bosses under one roof isn’t a recipe for success, and it was initially a strain on their marriage. Eventually, everyone adapted to the new situation, but it is naïve to assume that everything will continue as it once was.
Finally, don’t overlook the importance of finding a way to celebrate your accomplishment and the incredible effort that got you to this point. You’ve done it; this is the American dream.
For years, or even perhaps your entire working life, you have been your own boss. You’ve had the power to hire and fire. You could come in on weekends, work long hours, and ultimately be in control. After the sale of a business, “retirement” may seem stale. It’s important to figure out what your next move might be. Are you interested in starting another business, running for office, joining a board of directors, mentoring aspiring entrepreneurs, or turning a hobby about which you’re passionate into a not-for-profit? Finding a purpose and setting goals is an important part of ensuring that life post-liquidity event is all that it’s cracked up to be. Perhaps author Robert Byrne said it best: “The purpose of life is a life of purpose.”
In the midst of a transition event? Contact Balentine today to let us help you simplify the wealth-transfer process so that you can enjoy your wealth and establish a legacy for future generations.