Everyone has heard of pre-transaction planning. But what about post-transaction planning, an equally important, yet often overlooked process?
How you set up the ownership or company structure can greatly impact the proceeds that come on the back end of your business sale, says Michael Krol, head of wealth advisory at Waldron Private Wealth.
However, post-transaction planning is far more than structure. It encompasses your post-sale mindset as well.
“Typically, the stories we hear from our clients, post-sale, is that there’s more changes than they typically expect — and that’s not unique to private equity, that’s in any type of acquisition,” he says.
This week, Krol discusses post-sale changes that catch many business owners off guard.
Why is it so hard for business owners to adjust after a sale goes through?
It’s amazing how often we see it, and I think it’s unique to business owners, that the personal finances are in large part neglected because it takes so much to first create and then drive success in a business. It becomes the second fiddle to the business.
It’s often completely neglected, until you wake up one morning and you’ve sold your business and now it’s the most important thing that you need to be focusing on, but you haven’t focused on it in the past 10, 20, 30, 40 years.
What is the biggest adjustment for business owners regarding their wealth?
No. 1 is balance sheet transition. There’s this transition from living your life on this illiquid asset that you can control and you can drive income from, to now you’re likely living your life on a portfolio, which requires a completely different skill set and a completely different management style.
Often, we hear business owners say, “OK, my income from the business was $3 million a year. How is my portfolio going to generate income of $3 million per year?” That’s actually the wrong question to be asking.
So, how do business owners know whether their portfolio can support their lifestyle?
Trying to figure out what it takes to live the lifestyle that you want to live is an exercise that isn’t straightforward. We put a lot of time into understanding that, preferably in advance of the sale because it’s better to figure that out before you sell.
When we meet people post-sale that haven’t focused on it, we often have to try to help them unravel what it is truly going to cost to run their lifestyle, now that they no longer have this business entity where they had some combination of salary, distributions and expenses that might be going through that business.
When there was that stream of income coming through the business, that was the comfort, and that’s what provided the security to make certain decisions. But when that stream of income goes away — and you’re now living your lifestyle on an investment portfolio that maybe you don’t quite understand — it becomes a lot more complicated.
What do business owners need to understand about living off of a portfolio?
The value of their business probably fluctuated wildly every day; they just never saw that because it was a privately owned business. But now they’ve taken their large chunk of liquidity, where they’ve never seen this much money before in their lives, and it’s going into the market, and it’s going up and down every day.
For that reason, we take a specialized approach to helping business owners deal with that very significant item. Because the last thing you want to do — and we’ve seen clients come to this — is put all your money into the market. You go through a period like the fourth quarter of 2018 and all of a sudden you have these paper losses. You’re concerned and then you start making bad decisions with your portfolio.
How should business owners weigh whether to roll equity into their sale?
When they go from owner to employee, a lot changes. That’s something we encourage people to think about when they’re considering taking a carried interest or a rolled equity interest.
This is no longer an investment in you personally running the business, this is an investment in an entity that you may or may not be affiliated with and that may or may not be run the way that you think it should be run.
Most people don’t think about that going into the deal, because they think, “Well, I have equity in their business that I own and control.” But it’s no longer a bet on themselves, it’s a bet on a different entity.