You've sold a business - now what?

You’ve sold a business – now what?

Richard Pilley

Authorised Financial Adviser

Richard joined Milford in 2017 and has over 20 years experience in the wealth management industry in Europe and NZ. After helping to build the presence of a major Scandinavian bank in London, he went on to gain experience in their asset management division in Stockholm. On returning to London he worked at a senior level with a number of leading European wealth managers including Credit Suisse and Julius Baer. Richard and his family moved to NZ in 2008 and he joins Milford from ANZ where he was Associate Director in the ANZ Private Bank. Richard holds a Diploma in Business Studies from the UK and he is an Authorised Financial Adviser.

The sale of a business should be a time of celebration and happiness, but for many it is the start of a difficult and sometimes confusing period.

Apart from the unsettling experience of letting go of something they have nurtured and helped to grow, the business owner also faces difficult decisions such as; what to do next, how to manage relationships with family and friends, and where to find good advice.

Following a liquidity event such as the sale of a business, there will undoubtedly be a plethora of investment advisers, family members and friends jostling for attention. However, by far the best course of action is to do nothing at least for a few months, while the ex-business owner gets used to their new life.

The management of relationships with family and friends is complex and will naturally be different from case to case.

Managing the proceeds of a business sale

When it comes to the management of wealth, there is a framework that can help a freshly sold-up business owner think through their new balance sheet and start to plan for the future.

When we talk about the “balance sheet” in this sense it is helpful to think of assets being held in three different “buckets”;

1. Safe, secure, personal assets (such as your home, cash deposits);

These are assets that make you feel comfortable and/or provide you with liquidity if required for emergencies. As a trade-off for these qualities, you are prepared to accept lower than market returns on these assets.

2. Diversified market assets (such as equities and bond portfolios);

These assets are designed to meet (or, hopefully, beat) market investment returns at an acceptable level of risk, but also provide some liquidity if required.

3. Aspirational, risky assets (such as privately-owned business, private equity funds and other alternative investments);

These are the assets with the potential for significant upside, but also carry the most risk. They are generally illiquid and difficult to realise in an emergency.

This concept is known by many names such as “Goals-based asset allocation” or “Wealth allocation framework”. Whatever name you give it, it’s a helpful concept to start thinking through the next stage of life after business ownership.

Source: Ashvin B. Chhabra

There is no right or wrong answer to the allocation between these “buckets”. It is dependent on the goals and objectives of each individual and their families.

For example, some entrepreneurs will be keen to get back into business and will decide to put a significant portion of their assets back to work in their own business or other private company investments with a view to attempting to enhance their wealth significantly, thereby having a large exposure to the “aspirational/risky bucket”.

However, generally speaking, the allocation to this bucket should not be more than the investor is prepared to lose.

Others will be keen to maintain their lifestyle, inflation-proof their hard-earned wealth and provide the next generation with an appropriate legacy. These individuals will need to make prudent investments in diversified markets, thereby increasing the “market risk bucket”.

Whatever the final decision, it’s important to have a plan and this framework provides a good initial approach to thinking through that plan.

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