Jul 7, 201401:36 PMOpen Mic
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Why business owners should prepare for post-sale transitions and finances
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We have worked with a number of entrepreneurs over the years who have poured their hearts and souls into their businesses. And when the time is right, generally before normal retirement age, some take an opportunity to sell their company. It often allows an entrepreneur to sell at the right time — when the price they can get for their business is optimal, when it’s time for diversification, or before health issues or other problems might force them to sell.
These same owners are generally well advised on the structure of the deal, the valuation, and any legal issues. What few ever prepare for is the financial aftermath and the fact that, once the deal is complete, they will have a potentially large lump sum of money. And from our experience, this can be a very difficult transition.
Why is planning ahead rare?
It makes sense why so few people plan ahead. Most don’t want to “jinx” the deal by talking about the money before it is in hand. Most are also still too deeply enmeshed in the business or in negotiating the transaction to give much thought to the post-close financial windfall. They generally don’t talk about their eventual payout because they are busy communicating with employees and working out the final details of the deal, while still running their business.
But the reality is this will be one of the pinnacles of business transactions a company owner and his or her net worth will ever make. The owner will go from having a concentrated holding and the bulk of his net worth tied up in his business to selling it all for a lump sum of cash. Many times the majority of the owner’s investment is in the business and he or she has little experience with “marketable securities.” He or she may go from owning an asset that was not easily valued to holding a diversified portfolio that will be valued daily and may fluctuate widely.
Selling a business is emotional. As students of behavioral finance, we know that people’s emotions often faultily drive financial decision-making. It is why people buy high and sell low. It can be very challenging for anyone not to be impacted by his or her emotions during this significant change in their lives.
To combat these emotional challenges, think about what you will likely go through post sale. The news coverage will make it a very public experience. Your company sale will be in the paper, and you can expect many people — friends and strangers alike — to call and try to get in on your good fortune.
Assuming you do not continue on as an employee of your former company, once the sale is complete you will part ways with people and a company that has been a focal point of your time and energy. You may sorely miss the stimulation of running a company. You may still want to be in the game. You may find yourself with a lot of time on your hands. It isn’t like retirement. Most business owners have so much of their identity tied up in their business, but now it is no longer theirs.
These same business owners who invested most of their energy in their businesses have few hobbies and are rarely experts at anything outside of their businesses. Even fewer know much if anything about managing their investments, income planning, or the tax implications of their portfolios.