In my prior life as an investment banker working in M&A, my objectives for any client were strictly transaction-based: Prepare the company for the sale, go to market and close a deal that puts the greatest amount of after-tax dollars in the owner’s pocket. I paid little (if any) attention to what happened to the client afterward.
It wasn’t until I began working as a financial strategist for a number of people going through divorce that I gained a new perspective. After all, a divorce is essentially an M&A transaction, a divestiture of two entities that once merged. In both cases, a successful transaction is one that maximizes the net proceeds to the individual and preserves his/her net worth long after the court documents are filed.
Too often entrepreneurs are hyperfocused on the value of the sale and fail to adequately consider all financial implications, including whether the payout will truly cover their lifestyle and income needs. The two most common financial oversights entrepreneurs make are underestimating how many of their everyday expenses are being subsidized by their business—medical and life insurance premiums, club memberships, vehicles, travel and entertainment costs, etc.—and overestimating the amount of after-tax investment income that can be generated from the proceeds of the sale.
Entrepreneurs also face the difficult challenge of giving up some control of their wealth—the wealth that, until the sale, was tied up in their business, an illiquid asset that they nonetheless managed. Moving that asset into a well-diversified investment portfolio, one that maximizes after-tax income while continuing to build wealth, requires ceding some control to experts, including, but not limited to, a financial advisor, a CPA and an estate-planning attorney.
Transitioning through life’s milestones isn’t always easy. Whether you exit a business or end a marriage, the steps taken after securing the payout are as consequential as the ones taken to obtain it. This leads me to my last piece of advice: Don’t rush it.
According to Douglas Freeman, executive vice president and director of trust services and consulting at First Foundation Bank in Irvine, Calif., an effective succession plan for a business owner requires anywhere from three to five years to play out. “The reason is twofold,” he says. “First, to maximize the total enterprise value of the business, and second, to prepare yourself for life after the transaction.”
Five years may feel like an unreasonable amount of time to work through this process. But the way I see it, devoting these years to making sure the previous 20 support the next 20 is a small price to pay.
