Viewing Liquidity as a Business: Strategic Management Post-Sale
Selling a family business is both an emotional and financial milestone. Whether the entire family was involved in the company or not, selling it signifies the end of an era and the beginning of a new chapter for the whole family. The liquidity event resulting from the sale provides a substantial financial opportunity but also requires careful management to ensure long-term wealth preservation and growth. Just as the family business was managed with strategic planning and governance, the newfound liquidity should be treated with the same rigour. In short, treat your family wealth like a business. This strategic approach helps maintain family unity and ensures wealth serves the family’s long-term goals and values. If your goal is to utilize the sale of a family business to create a generation financial legacy, read on to learn some of our perspectives on making it happen.
Adopt a Business Mindset
Treating a liquidity event as a new business opportunity involves creating a comprehensive strategic plan. This plan should reflect the family's long-term goals and values, ensuring that all financial decisions support these objectives. Viewing the asset pool created by liquidity as the capitalization of a new business helps maintain discipline and clarity in managing substantial funds.
Even a simple investment portfolio has expenses (legal, portfolio management fees, tax planning, computers, hardware, employees even {family members or otherwise}) which are there to generate the maximum returns for the business (or, in this case, the family), in the same way, that your operating business did when you owned it.
Governance and Planning
Establishing precise governance mechanisms to facilitate informed decision-making and maintain family alignment. Develop detailed strategic and financial plans outlining investment strategies, expense plans, cashflow expectations and spending policies.
The most substantial legacies are built on a solid foundation of access to information and trust. Whether future generations are part of the decision-making structure or not, they should be considered from the perspective that they will have a stake in the success or failure of whatever plans are executed. These plans should encompass short-term and long-term goals, risk tolerance, and individual family members' roles in managing the wealth.
Investment and Spending Strategies
The age-old advice of “diversify investments to balance risk and return” is present here but not in the simple way an investment advisor may consider it. Less “stocks and bonds” and more “asset classes and liquidity.” Asset classes include stocks and bonds but can also include private equity (funds and direct investments), venture capital (both funds and direct investments, real estate holdings, alternative currencies, etc.
The family should consider whether they wish to maintain a “passive” investment business or a more active one, potentially taking significant equity interests in operating companies and actively working to grow their value. All of these decisions should be made by accounting for risk tolerance, cash flow needs, and the interest and capacity of family members to get involved in the business. Regular evaluation and potential changes to strategy should further reinforce this feeling of control and assurance.
A business has profitability expectations, and so should your family investment business. Anticipated cash flows and dividends, plans around distributing assets to family members, and the timing of such distributions (house purchases, education, children, for example) should all be part of the plan, and open communication among the senior management (family members) should be table stakes.
Engage Advisors and Educate Family Members
Work with trusted advisors to navigate complex decisions and align your business plans with long-term goals. Financial advisors can provide valuable insights, manage portfolios, and ensure investment strategies align with the family’s objectives, but they should not be the primary decision-makers. Educate family members about financial management to maintain discipline and ensure informed participation in wealth management. Financial literacy takes time, and wealth may take many years to gain comfort with, and you shouldn’t wait until the last minute to expect children or relatives to be prepared.
It's a common practice for senior family members to avoid discussing or distributing resources to younger family members, often under the guise of 'not creating entitled children.' However, this approach can lead to a 'lottery winner' scenario in the long run, where a significant portion of lottery winners find themselves bankrupt within a relatively short time. If children of wealthy families are not educated and prepared for an influx of capital, then the family has inadvertently created lottery winners when there is an inheritance event. Early financial education is key to avoiding such situations and fostering a sense of responsibility among heirs.
Consider the benefits of allowing your heirs to demonstrate good character and habits around wealth through smaller, yet meaningful, access to family liquidity. This approach not only ensures a gradual transition of wealth but also provides an opportunity for heirs to learn and grow. It's important to ensure they are given all the advice and guidance opportunities that you avail yourself of, fostering a sense of responsibility and preparedness.
Families can effectively manage their wealth post-sale by treating liquidity as a business. This strategic approach helps preserve the financial legacy for future generations.
For professional guidance, families can seek advice from Peninsula Road.