It takes a great deal of time, effort and brains to build a successful privately held company. Moreover, successful privately held companies are the primary way for entrepreneurs to become personally wealthy. This can happen as the company does well creating surplus wealth. It can also happen when the company is sold for a multiple of earnings or some other premium to book value.
Wealth management solutions can play a substantial role in several ways when the company is operational from motivating employees to creating private wealth while mitigating business risks. Wealth management solutions prove to be instrumental to business owners who want to sell their companies. They can also be instrumental to business owners after their companies have been sold.
Missing pre-sale wealth management opportunities: When it comes to the sale of a privately held business when wealth management is part of the approach pre-sale, there will likely be opportunities to structure the situation resulting in more money going to the entrepreneurs and their families. Before the sale, for instance, a high-quality wealth manager will often evaluate what financial and legal actions you have taken to date. The aim is to make sure all the wealth planning you have done so far is done well and, most importantly, going to enable the sellers to best achieve their financial goals and objectives. After such evaluations, many business owners find there are ways to further refine and improve their personal financial situations.
Unfortunately, most business owners are not paying much attention to pre-sale wealth management solutions. In a survey of 208 successful business owners looking to sell their companies within the next five years, only about 6% of them are presently taking steps to maximize personal or family wealth.
“Given some time before the sale of a company, many business owners can set up legal structures and use financial products to lower and in some cases eliminate most of the taxes on the sale,” says Anthony Glomski, principal and founder of AG Asset Advisory Family Office and author of Liquidity and You: A Personal Guide for Tech and Business Entrepreneurs Approaching an Exit. “For example, there are different types of trusts that can be used. Opportunity zones and installment sales are other possibilities. For some business owners, offshore pension plans are good options.”
While many business owners may be missing tax-saving opportunities pre-sale, they may also be making mistakes post-sale.
Wealth management after the sale: Based on the study of 208 business owners, 95% of them expect a financial windfall from the sale of their companies. They anticipate selling for a good price turning non-financial wealth into more substantial financial wealth.
With all efforts being made to sell the company, what to do with the monies from the sale is not always thought through pre-sale. There are items such as vacation homes and boats that some people want to buy once they have the monies and the time. And, there is usually the recognition that the now liquid wealth will benefit from professional investment management. However, less than 20% of the 208 business owners surveyed have thoughtfully considered how to manage their financial windfall.
According to Homer Smith, managing founder of Konvergent Wealth Partners, and co-author of Optimizing the Financial Lives of Clients: Harness the Power of an Accounting Firm’s Elite Wealth Management Practice. “As most entrepreneurs, only have substantial investable assets once they sell their companies, the influx of liquid wealth can sometimes be confusing or problematic. If not handled smartly, there is the possibility of some serious adverse consequences such as paying legally avoidable taxes because they fail to integrate investment management with capable wealth planning.”
“For most entrepreneurs, with the sale of their businesses and their liquidity, there is usually a need to redo their estate plans,” says Glomski. “For example, the way they were transferring business assets such as through certain legal structures and discounting is no longer viable. Also, the ways the monies are being managed and the opportunities to transfer ownership can necessitate a need for a new estate plan.”
Another wealth planning consideration, post-sale is protecting your wealth from unfounded lawsuits. “Asset protection planning is substantially different if your money is locked up in your business compared to when much of it is liquid,” says Vince Annable, CEO and founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives. “With financial assets, for example, the ways trusts can be used can vary extensively than when the equity in a privately held company is involved.”
“Charitable planning has certain benefits pre-sale. However, for many business owners, being philanthropic can become more important when their wealth is liquid,” says P.J. DiNuzzo, founder and lead coordinator of DiNuzzo Middle-Market Family Office and Wall Street Journal bestselling author of the book, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families. “In fact, in some cases, being liquid provides entrepreneurs the opportunity to help the causes that are important to them. Something they could not do when the monies were tied up in their companies.”
Implications: Wealth management solutions can make a meaningful difference in the amount of personal wealth business owners walk away with when they sell their companies. For business owners to optimally benefit from wealth management pre-sale requires them to take steps in advance—sometimes way in advance—of the sale.
Wealth management solutions are also often critical to growing or maintaining personal wealth post-sale. Included here is often an array of investment management and wealth planning solutions.
For business owners to optimize their financial worlds they need to work with caring, talented, and capable wealth management professionals. Taking the time and effort to find these professionals and structure the relationship translates into significantly more personal wealth and usually considerably less stress.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
