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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?


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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Get Rich Quick: An Exercise in Risk

There is an old adage, “slow and steady wins the race.”  It has been shown time and time again that the best way to build and maintain long term wealth is a well-disciplined savings and investment plan that starts early and builds over time.  For most people that are trying to retire or working their way there this is going to be the key to success.  As a financial adviser, I believe in this wholeheartedly.  I preach this to clients and help provide these clients with the correct discipline to stay on track. However, there is a large group of my clients, entrepreneurs and executives alike, that didn’t earn their wealth this way.  They took a risk by either starting a company themselves or accumulating a concentrated position in one company as part of their compensation. In either case, these companies took off and the individuals became wealthy as a result.  Their wealth was primarily created by being highly concentrated in one stock or business. So how do I rationalize stories like these, with the belief that a well-diversified, disciplined savings approach is the best way to build wealth?

The simple answer is these individuals have different ways of diversifying, different ways of balancing risk and, most importantly, a comfort with the risks they are assuming. So while their way of building wealth seems much different than a traditional wealth accumulation strategy there are many similarities.q

Calculated Risk:  In speaking with entrepreneurs and other professionals that built their wealth by being highly concentrated I have found one common thread.  These people understood the risk they were taking.  They understood that they could end up with nothing and they were comfortable with it.  For most people this type of risk would be unfathomable.  They would not be able to sleep at night knowing that all their hard work could amount to nothing. But these “risk takers” had calculated the risk and felt that the potential payout was worth the inherent risk. As an adviser, my job is to help clients manage their financial lives based on the client’s risk tolerance and goals. So while for most people that means a steady savings and investment plan, for these individuals the calculated risk that they were taking fit into their risk profile.

Conservative Balance: The interesting thing I have also found with these same individuals is that while they were comfortable with the risk they were taking within their business lives. They were very risk averse when it comes to any money outside of their concentrated position or business.  They build up larger cash reserves than most people typically should and their investment portfolios outside of their business definitely skew more to the conservative side.  With all of the risk they are taking in one area, they are balancing it out in most others.

De-risking: While these individuals are comfortable taking these initial risks they often struggle with letting go of the risk when it is appropriate.  This tends to be a time when many of these individuals engage with me or other advisers to help proved some investment discipline.  As with most entrepreneurs or successful professionals, they have an endless drive and are convinced that no matter what happens they can go out and build another company or do something to earn enough money to be happy.  This is where investment and financial discipline is important.  Although these people built their wealth by taking risks, maintaining this wealth is about de-risking.  Whether the wealth was created by the sale of a business or a jump in stock, de-risking and setting money aside creates a foundation for future success and can put them in a position to still take calculated risks when appropriate. The goal is to help these individuals avoid what I call “Serial Entrepreneur Syndrome.”  Too often I speak with people that built and sold a business, only to reinvest everything in a new venture and have it fail and them be back to zero.  At the time of the initial sale had they taken the steps to de-risk even a portion of their proceeds, they still can start a new venture but this time  they have a safety net that wasn’t there before and their family and future are secure no matter what the outcome of the second, third or fourth venture.

This same thought process holds true for folks that build their wealth from stock accumulation.  They become so emotionally tied to their company that they think that is the only way to continue to build their wealth. But by taking a little of the exposure off the table they set themselves up for a more stable future.  They already have their income tied to the success of the company, there is no reason to have all of their wealth tied to it as well.

Diversifying in other ways:  When we talk about diversification we are almost always talking about it from an investment portfolio standpoint. We spread our investments over a series of asset classes in an attempt to reduce our overall risk. These entrepreneurs diversify their risk in a different way.  They view their company as the investment portfolio.  They reduce their risk by making sure the business is running correctly and by reducing risks within the company. They try to hire the right people. Allocate their capital appropriately and manage revenue and expenses efficiently.  By taking these positive steps they are reducing the potential of failure within the company.  So while their overall risk is much higher than if they had a well-diversified portfolio of investments they are taking steps to reduce their risk exposure along the way. Yes, there are other outside risk factors that can always effect a business and not everyone does a great job managing their companies risk exposure. But that is why this type of risky behavior is not for everyone and why the potential payout or benefit can be so great.

In order to rationalize this more risky wealth accumulation strategy it is important to understand that these individuals are not just putting all of their eggs in one basket for the remainder of their life.  They are calculating the risk it will take to create their wealth. They are then taking steps to balance that risk in other areas of their life, hiring professionals to help them de-risk and help maintain their wealth and diversifying their risk exposure in other ways. This type of wealth accumulation strategy would not work for most people.  Most people don’t have the stomach to deal with the potential negative consequences of this level of risk. But for those that do, and also have the discipline to assess their situation thoughtfully along the way, this can be a very powerful way to create wealth as long as they are comfortable with losing it just as quickly.

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An Entrepreneur’s Guide to Wealth Planning

Building a company can be a very rewarding experience.  It takes vision, determination, luck and a whole lot of hard work.  Many of the entrepreneurs I work with embody these characteristics but also have a unique ability to have a laser focus on their company and avoid distractions from the outside world.  While this focus is a key to driving their company’s success it often leads to other parts of their life being put on the back burner.  One of the areas I often see neglected is their long term financial well-being.

Now, I hate to be the bearer of bad news, but not all new companies are successful.  The failure rate is quite high.  With that said, failure or success of a company doesn’t have to be the only driving force behind the success or failure of your long term financial goals.  Simple planning strategies throughout the lifecycle of your company can put you in a position to fully reap the rewards of your hard work if your company is successful while also creating a foundation for the future if things go more Quirky than Google on you.

Here are some simple strategies that can help you build that foundation for your future and when your company does take off, allow you to maximize your long term wealth. I plan to do a deeper dive into a few of these at a later date but this will give a quick overview:

  • Understanding Paper Wealth vs. Actual Wealth: As entrepreneurs build their companies, go through various stages of funding and reach certain levels of success they may find themselves wealthy on paper, with little actual money to show for it. This can often complicate any forward looking financial planning they may be doing.  It is difficult to think about saving any money outside the company or focusing on any outside planning when so much of their financial well-being is tied to their company.  However, putting a strategy in place to manage the dollars outside of the company and protect against the unforeseen can provide a level of security and can provide a much better footing if things don’t go exactly according to plan.  Paper wealth has a tendency to be very volatile so it is important to plan with this in mind.
  • 83(b) Election: How does the saying go? “The only things certain in life are death and taxes.” Building and selling a company, or shares of a company, is a very rewarding experience. And at times can be very lucrative. However, when that payday does finally come there is the unfortunate but inevitable requirement to pay taxes. While you can’t avoid taxes all together there are certain steps that can be taken early on to help minimize this burden. An 83(b) election can allow you to determine when you pay ordinary income tax and when you pay capital gains.  With the current difference between long term capital gains rates and the higher levels of ordinary income rates, this can have a drastic effect on your overall tax bill and allow you to keep more of what you built. This election must be made within 30 days of receiving any stock so planning early in the lifecycle of a company is essential to take advantage of this benefit. An 83 (b) election is not right for everyone and it is very important to speak with an advisor and tax counsel to determine if and when it is appropriate.
  • Estate Planning and Gifting Strategies: Entrepreneurs work hard to build great companies but often fail to do any planning when it comes to proper ownership structure of their company equity. Most entrepreneurs don’t like to get ahead of themselves and think of the money they could potentially make if their company takes off or is sold.  However, in this day, these types of pay days can often mean generation changing wealth for an owner and their family. While this initial payday is great, in order to make sure this wealth fulfills any legacy goals certain estate planning and gifting strategies must be implemented.  Utilizing different types of trusts, gifting shares at certain points along a company’s lifecycle and realizing any philanthropic intentions can have a drastic impact on the amount of wealth that is subject to estate tax or passes to the next generation. Implementing these strategies early in a company’s lifecycle allows for the greatest amount of flexibility in this planning and provides the greatest number of planning options. Again, I will stress the importance of speaking with an estate tax attorney before implementing any of these strategies.
  • Traditional Saving: This one may seem so simple but I find that many entrepreneurs are so focused on building their own company that they fail to do any savings outside of the company.  Whether you are bootstrapping a company and  plowing any and all money back into it or have received funding from outside investors, a disciplined savings plan can help to reduce taxes and provide a safety net should things not go according to plan.
  • Balancing Risk Vs. Stability: As I mentioned earlier, the success rate for start-ups is not very high. This means founding and building a company is a very risky endeavor. More often than not, I see entrepreneurs devoting all their time, money and resources to their business. While this risk can have a great payout there are also certain times that it is important to take a step back and understand this risk and see if there is anything that can be done to balance this risk with some stability.  This could come in the form of setting some money aside for a rainy day or managing some investments outside of the core business.  This balance between risk and stability is especially important after a liquidity event.  Many serial entrepreneurs receive a payout from one company and immediately put it all toward their next venture. I understand that the way these people were initially successful was to take risks, however having the discipline to set some money aside can help provide a life of stability while still allowing them to take other risks.

This is not an exhaustive list, by any means, but implementing some of these strategies can have a drastic impact on long term financial success, regardless of the success of your company. Utilizing some of these strategies also does not have to be a time consuming burden but should be considered as part of the company building process. With the lives of entrepreneurs so intertwined with their companies personal financial planning should be used to compliment and strengthen your company not be an outside burden that takes away from it.