Why business owners should prepare for post-sale transitions and finances

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.

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Take specific steps

So while many won’t want to talk about the specifics of the money that is coming after they sell their company, business owners should take time to think about the financial and emotional ramifications, talk about their goals, and take a few steps to ease this important transition. A few factors to consider:

• Make a list: Write down all the reasons you decided to sell. Refer to it when things get tough.
• Mentally prepare: You’ll be in a better position to manage emotions, think clearly, and keep up your stamina throughout the sale process.
• Get health insurance: Many business owners do not continue on the company plan. While it is generally easier now to get coverage with the exchanges, you still have to make a decision.
• Determine monthly living expenses: When you transition from working to not working, you will no longer be earning an income and instead have to rely on your investments to generate an income stream. That means you have to think about how much you need to live on from day to day. Remember to include expenses that may have been business expenses until now (country club dues, memberships, subscriptions, leases, etc.).
• Determine your risk tolerance: Think about how important it is to preserve your wealth. We find that many business owners struggle psychologically with the fact that they’ve transitioned all of their net worth into an asset that is now valued daily. An investment portfolio can fluctuate quite a bit more than the value of the business ever did. For many, this is a key source of anxiety. While business owners often felt in control while running their businesses, many feel a lack of control on a 200-point down day in the market.
• Consider the timing of the sale and investing over time: While it is hard to plan, the timing of your sale can have a significant impact. If you sold your business in 2007 or early 2008 just before the financial crisis, you had a much different experience than someone who sold and invested his or her proceeds in 2009 at the start of the recovery and bull market. For most, the priority is to preserve the wealth they’ve created, and we generally encourage business owners to keep this in mind and to average into any equity or risk assets slowly over as long as a year. We also encourage most business owners to err on the side of being more conservative, at least initially.
• Take your time on the big purchase decision: In our experience, many business owners immediately buy an asset to celebrate the sale — a luxury vacation condo; a new, expansive home; a sports car — even before they’ve given any thought to their financial future. This may be perfectly justified. But it is a good idea to plan for what you can afford to take out and still be able to maintain a desired lifestyle. Few families think this through, and some later regret such a large purchase.
• Prepare for tax implications: There will often be a big tax payment. It should be obvious, but that payment should be segregated right away. In fact, we had a client who sold a business in 2007 and owed a significant tax payment in 2008 just as the market began to collapse. This client not only worried about having the money to make the payment but also had to contemplate where it was safe to hold the money.
• Update estate plans: Some owners want to take the opportunity to do some estate planning at this point and spread the wealth across multiple generations. For many, this can be a good time. But an estimate of the lifetime income needs of the business owner will help determine how much is available for the family.
• Staying on? There will be a transition: For someone who stays on after the sale and begins drawing an income, this transition into corporate America from a family-owned business can either be a joy or a challenge. Preparing for what this might mean emotionally and financially is important.
• Where will you wire the money? More often than not, a business owner is scrambling to determine where to wire the money once the deal closes. Giving some thought to what you want to do with your lump sum will help.

Having a preliminary plan, even if it isn’t finalized, will help ease the transition. Money can be emotional. Selling your business can be emotional. Fear and greed can take over for many business owners during this transition. And the emotions here are often even more complicated than in other financial transitions. But taking a little time to think through what you will do with the proceeds post sale can help ease the transition.

Kelly Baumbach, CFP, is managing director and principal at Bronfman E.L. Rothschild.

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