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You Sold Your Company: Now What?

I’ll start by clarifying one thing, this post isn’t just for people that have sold a company. As much as we hear about company acquisitions in the financial news, selling a company is pretty rare. With all of the entrepreneurs and start-ups in the world, the actual number of companies that grow to a point of acquisition is tiny and most of the ones that do sell are not your Snapchats and Instagrams that reach rapid, almost overnight, success.  They are companies that grow gradually over time, maybe even being passed down through generations before being sold. With that said, the lessons from this post can also be applied to other transitions in life.  It could be a windfall from an inheritance, the realization of profit from stock options or even a simple transition to retirement.  In any case, the planning that you do leading up to, during, and after such an event can have a vast impact on the success of the transition and your future goals.  This applies not only to the financial side of things but also to the emotional transition people experience.

So, you sold your company. Congratulations. You worked your butt off and now you are about to reap the benefits. You can kick back, relax and spend the rest of your days lounging on the beach, sipping pina coladas. As idyllic as this may sound to some, this is not reality.  Yes, you have some new found wealth, more flexibility in your schedule, but you still have work to do.  Transitioning from building a company to life after the company isn’t like flicking a switch.  You need that new wealth to provide you with income. You need that new wealth to last for the rest of your life.  All this while adapting to a life where the main focus isn’t the company anymore.  Many people I work with struggle with this emotional part more than any other.

So how do you make this transition successful?

Pre-Planning

Just because your company is in the growth phase and hasn’t sold yet doesn’t mean there aren’t strategies that can be implemented to benefit you and your family in the long run.  During this time frame it is important that proper ownership of company stock is reviewed and that steps are taken to create a transition plan.  There should be a plan in place to make the transition from earning money to needing income.  This plan should be reviewed and discussed prior to any sale to ensure there is appropriate liquidity from the start and there isn’t a lag period.

There are also some wealth transfer strategies that lose their effectiveness the more mature the company gets.  The key to most wealth transfer and estate planning strategies is to control when and at what valuation something is included in your estate or gifted to a trust or other individual.  This discussion is much more complicated than can be covered in this blog post and will be the topic of a future post. However here are two basic strategies that could be appropriate.  As with all estate planning and tax related strategies, please speak with your tax or estate planning attorney to decide what strategies are appropriate for you.

  • Gifting: This is the simplest form of wealth transfer. You can simply gift shares of your company to a child or other individual.  The IRS sets forth lifetime gifting rules and restrictions so being able to gift an asset when its valuation is low can allow any future growth of an asset to avoid being included in your estate.  This is not always the best strategy from a control standpoint but could allow you to shelter significant growth from your estate.
  • GRAT: A Grantor Retained Annuity Trust also allows you to remove appreciation from your estate in return for a stream of income over the life of the trust. An asset (in this case, company stock) is placed in the trust for a set period of time. During that time the trust must pay out an annuity stream back to the grantor during the life of the trust.  With interest rates still at such low levels, this income requirement is quite low allowing more money to stay in the trust.  When the life of the trust expires the remainder passes along to the beneficiary of the trust. The beauty is that any asset growth during the life of the trust is not included in the gift amount. The gift amount is determined by valuation when the trust is established. If you expect your company stock to appreciate rapidly prior to an exit this can be a very efficient vehicle to keep that growth out of your estate and pass it on to your beneficiaries. (This is a very high-level description of a GRAT. There are many other caveats and details that should be considered and taken into account).

Transition to income

Financially, this is the major shift that someone will go through.  Throughout the lifespan of the company, you were working all the time and probably drawing some sort of paycheck to cover your bills and live your life.  Once the company sells this income stream vanishes. This means you must recreate a monthly income stream while also making sure there is enough capital to provide this income stream for many years to come. Too often I find people focusing exclusively on the income side of things and not taking into account that your principle also needs to grow in order to last the rest of your life.  If you sell a company when you are 50 you may need your assets to last more than 40 years, and often times you want to make sure there is some sort of legacy left behind.  To put this in perspective, with historic inflation averaging just over 3%, the amount of income you will need to maintain the same lifestyle as today will double in just over 20 years.  You need to make sure your principle is keeping up with this, especially if you have any legacy ambitions.

  • Income: Income can be created using a number of different strategies. Most commonly we create a balance between fixed income instruments (often times utilizing municipal bonds for the tax advantages) and dividend paying stocks. The balance will be dependent on the interest rate environment and a few other factors.  We also have the option of selling off security positions that have appreciated.  While traditionally this hasn’t been the most advantageous option, with capital gains rates at such low levels it can be considered if managed properly.
  • Growth: With many people I talk to that are either selling a company or transitioning to retirement they only focus on the income side of things. They are under the mindset that they need to cut out as much risk as possible.  Yes, I think for any money that you may need to spend in the next few years you should reduce risk substantially but with a large portion of retirement or post exit dollars the time frame can be longer than you think and this money should be managed appropriately.  This growth side could look very similar to your pre-exit/ retirement portfolio as the time frame is also longer term.  A longer term portfolio has the ability to withstand larger fluctuations in order to achieve long-term growth.

This strategy may seem different than what most people hear while they are building their wealth. We are always told to have a growth mindset while we are accumulating our wealth and then we should cut our risk when we make the transition to the income stage of life.  What I hope is apparent is that is exactly what we are doing.  By adding in an income producing layer we are reducing the overall risk within your assets but are still providing some opportunity for growth.

Future ventures

All of this financial management sounds great, but is this how the real world works? With most entrepreneurs I speak with, they don’t look at an exit as the end.  They look at it as a stepping stone to the next venture.  This can sometimes be a dangerous mindset from a financial planning standpoint.

It’s not always as simple as selling a company and then using that money to create income for the rest of their life. Many entrepreneurs want to take this new found wealth and use it to create the next big thing.  As a financial planner, this can create some difficult conversations. It is my job to help clients reach their goals. However, it is also my job to communicate the risks and rewards of financial decisions.  These risks and rewards are not just limited to financial outcomes but stretch across all aspects of life; family, work, philanthropy, lifestyle, and legacy.  It is important to understand that by simply taking a windfall and investing in the next venture you are not just risking financial loss but you could be risking your family’s long-term financial security.

Entrepreneurs can sometimes be blinded by success, often feeling like if they hit it big with one company they can easily do it again. You got rich by taking risks, but taking risks is not how you maintain wealth. You maintain wealth by managing risk. As I mentioned earlier, the success rate of start-ups is quite low so more often than not the prudent course of action is to create a balance between maintaining long-term wealth and taking a risk on the next opportunity.  This balance is going to look different for everyone but this is a very important time to evaluate risk well beyond financial loss. The goal is not to prevent future risk-taking and potentially miss out on creating that next great company. The goal is to put yourself in a position where you can have both.

Emotional Transition

This can sometimes be the most difficult part of selling a company (or retiring).  Entrepreneurs can grow attached to their companies and to their work.  It gives them purpose and in some cases is almost like another family member.  When you sell the company you need to fill this void, both from a time and an emotional standpoint. As a financial advisor, this is not my area of expertise but I think it is important to mention because the impact of this emotional transition can affect your financial lives especially when it comes to decision making.

There is no one way to emotionally handle this transition. Some people do it by relaxing. Some people get active with philanthropy. While others simply jump back into the waters with another venture, consulting work or board member responsibilities.  Whatever path works for you, it is just important to be mindful of this void and its impact on the rest of your life.

So, congratulations. You sold your company. Just remember, the work isn’t over yet.

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