Many families choose to sell or merge their business due to factors such as 1) lack of a succession plan; 2) heightened competition, 3) the need for liquidity for distributions; or 4) tax and estate planning issues.
One of the biggest challenges the family and their advisors face comes after the sale -- how to effectively manage this new liquid wealth successfully.
Having reached such a high level of financial success, the initial sense might be that families can coast into the sunset. But that’s rare. Managing wealth requires the same thought that was applied to building a business. Advisors need to help families create a plan that takes into account the many challenges liquid wealth can bring.
The first step is asking the right questions. Ask them if they should keep working, or embark on a new venture? Devote time to traveling? Pursue a new hobby? Children are part of the equation, and without a business to pass down to them, what about legacy issues and philanthropic endeavors?
There are sure to be emotional difficulties. A family business provided an organizational structure that they were familiar with and understood, but having effectively closed the door on that part of their lives, families will face a dramatic shift in everyone’s roles and responsibilities.
Existing trusted advisors (attorneys, tax planners, and the like) should always play a role, but with the myriad issues to decide and then implement, it should be a supporting role rather than a leading one. Wealth managers need to serve as quarterback, and to coordinate all the other advisory roles.
The following are the principles that advisors should emphasize for families who have sold businesses and have new liquidity:
Understand that managing wealth needs to be an integrated process. Investments, taxes, charitable giving, employment, leisure – all this and more need to be taken into consideration in concert.
Help define investment and financial goals. Generating income, minimizing taxes and preserving and growing capital, are all important and inter-related issues.
Diversify investments. Wealthy families are more susceptible to this issue because their chief asset previously was tied to a single company or stock.
Remember to help the family maintain focus on the skills and knowledge that created their wealth. Capital can be allocated for younger generations, so they too can enjoy the spirit of entrepreneurship.
Be aware of the “lifestyle” spending creep. A vacation house or two, a car collection, a yacht –these types of expenditures should fall within the unified parameters of a plan. Investments in such items should range between 5 and 10 percent of available capital.
Family philanthropy is a tool to unify and give back. With greater liquidity, philanthropy becomes more challenging, involving perhaps more time and meeting greater demands for contributions. The family philosophy on philanthropy should be codified in a mission statement.
Create a system for good family communication. Children, depending on age, should be made aware of the motivation of a sale and how it will impact the family’s finances and philosophies going forward.
Selling a family business is a lot more than just a liquidity event. It can result in a complete shift in lifestyle and a massive change in family focus. The post-business family faces a new management challenge that will require accomplished and experienced people to accept one of the most difficult things a powerful person will ever have to acknowledge – that they need help because they may not know exactly what they’re doing.
Rob Elliott, JD is the Vice Chairman and head of the New York City office of Market Street Trust, a Corning, NY-based multi-family office.