Entrepreneurs make their fortunes taking calculated risks and diving into situations, confident that hard work and nimble pivoting can get them there in the end. But this approach doesn’t always translate well to managing their personal finances.
Instead of relying on their business for their livelihood, those selling their businesses need to protect the capital they gain through considered, diversified investments that complement their post-business goals in life.
But experts say recipients of large windfalls of cash are prone to ignoring expert advice and making hasty decisions about spending.
Susan Bradley, founder of US-based Sudden Money Institute which specialises in life financial transitions for individuals and families, says “they’re either closing on a newer, larger home; they’re committed to buying a new business because they don’t know what else to do; or they’ve made commitments to family, or to themselves”.
What they need is a financial plan to build and manage an investment portfolio that is a detailed and considered map of personal goals, planning for the unexpected, and consulting experts – different skills to running a business.
For many business owners who have been through the long and stressful process of selling a business, jumping straight into a new life and financial plan may be too much. It can be beneficial to take some time out to rest and decide what’s next. Their cash can be managed in liquid investments to earn as much as possible during such a transitional time.
What to consider before selling
Selling a business can take up so much time and energy that it is common for business owners to leave building a personal financial structure until after the sale is done, but there are pre-sale matters that impact personal wealth, which should be considered earlier.
Ex-business owners often regret not receiving better advice leading up to the sale, says Luke McCann, national director of ANZ Private Advisory, which specialises in helping owners plan their transition from their business.
“Clients sometimes want to set up a charitable foundation at that stage of their life, but often they’ve missed the time to get the tax deduction,” McCann says. “They need to be doing it at a certain time in that process.”
Another area of personal finance that business owners are notoriously complacent about is superannuation, having long viewed the business itself as their nest egg.
Building up savings in a self-managed super fund reduces the risk posed to an owner by an unexpected hit to the business or the sale not going as well as planned. It also gets the business owner started on self-education about investing – learning different asset types, their personal risk profile and the importance of diversification and liquidity.
“If you know you are going to sell in three or five-years’ time, you want to start to look at what your asset allocation is going to look like and the various entity structures that are most efficient to make sure that you start to deploy wealth in the right areas as soon as possible,” McCann says.
“Often if a client is selling a large family business, there are benefits for funds to be in an SMSF. But if they haven’t built up the SMSF to a sustainable level, they are often left with a large tax bill and they may have limitations as to what moneys can be put into super post the sale.”
The importance of taking time out
Some business owners have a clear post-business vision, and have started building a narrative with those close to them. But the reality is that many have simply been too busy running the business.
Bradley says it is important for some receiving a windfall to “chill for a while”, take some time to get their head together after what is often a long and exhaustive journey of selling a business.
Taking some time out can help get into a space that is responsive, not reactive. But this is not always what hard-driving business owners want to hear.
“… we don’t like uncertainty, we don’t like ambiguity, we don’t like conflicting goals, and any decision is better than no decision so just keep moving,” Bradley says. “That’s really ingrained from childhood. A business owner has really mastered some of those skills and to redirect that takes a while.”
ANZ Private Advisory senior banker Joey Mouracadeh says setting goals that underlie a financial strategy can sometimes take years, and the bank often needs to give clients time to work them out before helping them build a financial strategy for the next phase of their lives.
“One of the things we do is help clients through that period by helping them earn as much as they can on their cash while they are spending time thinking about what they do want to do next,” Mouracadeh says.
With time, the business owner can figure out what is really important to them.
Basic considerations for a personal wealth plan
Bradley says a helpful question to get started is: What do you want to protect in your life? It could be family, relationships, health, vitality, a sport, or the ability to travel.
This may immediately rule out some investments such as buying a new business, or at least force the business owner to weigh up priorities. The business owner may have long been waiting for this sale so they can be around their family, and buying a new business would hinder this.
Understanding what your goals are, how much income you will need, and what big capital amounts could be due over the coming period – a holiday home, buying a boat, private school or tertiary-education fees for the children or grandchildren, as well as unexpected events – can help build a sound strategy.
Says McCann: “We encourage them to sit on boards, or get involved with the local school or get into a foundation. It’s trying to create a road map which is not just about facilitating the business sale but looking further ahead.”
It is also worth documenting unexpected expenses that could arise. Retirees may face unexpected medical issues, or they may need to provide care for their parents in medical facilities that require bonds that cost hundreds of thousands of dollars.
Financial-planning mistakes that business owners make
Understanding what risk you’re prepared to accept is really important when it comes to investing your money. An investor might think they’re comfortable with risk until a downturn causes their portfolio’s value to fall. In that situation some panic and sell, locking in their losses.
Connected to the above point, those close to retirement will need to keep an eye on the risk and volatility of their investments, while those who have years or even decades before retirement may be happy with more volatility.
Business owners sometimes neglect diversification and liquidity when building a portfolio due to their own experience of earning most of their wealth from a single asset, says Mouracadeh. Many have become accustomed to re-investing every dollar that isn’t spent, back into the business, but this approach needs to be reconsidered after the sale.
“Quite often if the business is successful, from the business owner’s perspective, higher returns from the business make a lot more sense than lower returns from something more conservative, and that encourages that behaviour,” Mouracadeh says.
It is common for Baby Boomers to hastily invest in property, having done well out of the housing market over the past three or more decades. But if they already hold property this quickly leads to an unstructured portfolio that may have unexpected maintenance costs, liquidity issues and high costs of unwinding.
“Typically what you will find is they can very easily become an asset gatherer and form a portfolio of good ideas as opposed to a robust portfolio,” says Paul Van Ross, a senior private banker and advisor at ANZ Private Advisory. “So concepts of correlation between assets and underlying risk are quite often not considered.”
Those with large families and detailed estate plans will need to consider the costs of unwinding investments and dividing wealth, he says.
Prepare for plans to change
Investments will vary depending on the business owner’s goals and the stage of their careers. When faced with the day-to-day reality of life after exiting their business, or with unexpected changes of events, plans often change. A good financial plan will make room for this.
It is a time when a good team of advisers or a private bank can step in to provide education and insight about defining new goals and building a robust strategy around them. This strategy can then be revisited on a regular basis as plans and circumstances evolve.