The sale of your business may be a pivotal moment in your life. You are transitioning away from one life to what may seem like a completely different one (that is unknown and, perhaps, a bit scary). According to the Exit Planning Institute’s Readiness Survey, 75% of business owners “profoundly regretted” selling their businesses 12 months after finalizing the deal. Planning for what comes after the sale of your business can put you in the minority of former business owners who have no regrets. How can you sell your business and be happy with the results?
Get What You Need
If you sell your business and the after-tax proceeds from the sale are not sufficient to support your desired lifestyle, you will likely be unhappy. To help avoid having a disappointing financial result from the sale, you should begin planning for the sale of your business well in advance of the sale. In fact, planning for the eventual sale of your business should begin on the day your business is created.
When planning for the sale of your business, you should begin at the end. That means understanding what you need to receive after taxes from the sale of your business to support your desired lifestyle. Your business may provide you with more than a salary and a distribution of profits. Many of the niceties of modern life may be provided by your business, perhaps a car, a cell phone, business travel to nice places (that might include some time off, too) and other things that make life pleasant. Therefore, when contemplating the potential future sale of your business, it is important to determine how you will replace the income and perquisites that the business currently provides (and perhaps to decide which of the perks you will do without).
The only way to know how the sale of your business will impact your and your family’s lifestyle is to prepare a comprehensive personal financial analysis that illustrates the cost of your lifestyle today and the sources of revenue used to fund those costs (your baseline) and additional financial illustrations that project the cost of future (and possibly other) lifestyles and the sources of revenue available to fund them. Hypothetical projections can illustrate the impact of good things like the purchase of vacation homes or long cruises. They can also illustrate the impact of life’s difficulties, like the costs associated with serious illness, long-term care, children who need support deep into adulthood and premature death.
Because each family’s financial goals and objectives are different, it is not feasible to state what your family would need to live life as you would wish (only you can do that). And without a complete and accurate personal financial plan, it is not possible to really know whether the price you expect to receive from the sale of your business will support your and your family’s lifestyle after the sale and provide for other desired financial goals, such as a family legacy or charitable giving plan.
Take Your Time
After the sale of your business, people may know that you have a lot of cash. They may come to you with all types of proposals, including the “next big thing,” “sure thing” or “can’t miss opportunity.” It will be flattering to receive their proposals. It will be exciting to be pursued and the thought of diving back into the familiar world of business will be comforting. But you may want to wait. Promoters who insist on a quick decision, without allowing time for appropriate analysis, may not be honest. Having a lot of ready cash may be new to you. You may want to let the dust settle on the sale of your business, and see what life is like for a time following the sale. Then, with a qualified investment professional, take the time necessary to evaluate future investments. Remember, the cash that you received from the sale of your business may be the only asset available to provide for you and your spouse for the rest of your lives. Use this time to learn about investing; you will have time to invest later, and when you do, you will better understand your investment.
Use an Investment Professional
You spent a lot of time and energy managing your business. To a large degree, you were able to control the direction of the business, its operations and its risk profile. As a business owner, you had a tremendous amount of control over how your capital was put to work. In fact, although it sometimes did not feel like it, you were able to manage your business, and therefore, your investment risk. Having sold your business, however, you now likely have cash which must be invested. The proceeds from the sale of your company may be your entire nest egg. What should you do?
Take your time. Do not rush into anything. Find and retain one or more competent investment professionals. In fact, interview many and review their records to find a professional with whom you will work well. Interview candidates as if you were interviewing a chief financial officer for your company. Then what? Consulting with your investment and tax advisors, develop an investment plan and begin to invest your cash. There is no one investment strategy that fits all investors. Working with your advisors, determine what works for you and your family.
Take the Emotion Out of Investing
It is important to understand that a very important change has occurred to your investment holdings, and the psychology of investing in the public markets is very different from investing in your own business. When your wealth was invested in your own business, you understood the risks associated with its operation. You had a rough idea of the value of your business, but without a formal valuation, you did not frequently measure it. To a great degree, you could control how your capital was deployed. When you owned your business, you knew that you were in charge. But as you invest in the public markets, you may feel that you lack control over your investments — they can change value every day. You can watch market results on television in almost real time. It can seem like there is no rhyme or reason to what is going on, and everyone has an opinion. Without good advice, the public markets can seem like a roller coaster ride where you can’t see the next twist coming. It can be nerve-wracking. Getting wrapped up in the fluctuations of the market can tempt you into making bad investment decisions.
What should you consider doing? Change the psychology of how you look at investing. Understand that public markets go up and go down. Accept that markets can move faster than you can adjust. Be calm and be rational. Get advice from your investment professionals. If you can avoid it, do not sell in down markets; instead, use market declines as opportunities. Working with a professional, take the time to develop a personal financial plan, and understand how your investments fit into your broader planning objectives for you and your family. Understanding your cash flow and liquidity needs as developed in a comprehensive financial plan can provide peace of mind during market volatility and downturns. You likely made similar decisions when budgeting for your business so that your business was able to operate during good times and bad. Above all, follow your investment strategy in good markets and in bad. It bears repeating, remain calm and do not panic. The ups and downs of the market can lead to emotional ups and downs. Let your investment professionals guide you through the process of investing and help limit the emotional impact of the markets.
As a business owner, you likely lived a very active life running your business, controlling your actions and the actions of others. Success depended upon your every move. But now the business has been sold. You may be tempted to immediately jump into the next project (or 10 projects) so that you do not lose the sense of urgency that running a business provided. Possible projects abound. They could involve charitable causes, other volunteer work, service on boards (both business and charitable), travel, hobbies or just work around the house. Nevertheless, you may want to resist the temptation to take on numerous new projects all at once. You have just experienced a major life-changing event. You may need to adapt to your new reality before you can decide what your future looks like.
Amazingly, “93% [of business owners] have no formal life-after-business plan.” So, what should you do after you sell your business?
First, consider taking some time off (a constant theme here). Recognize that your life has fundamentally changed. You may feel a sense of loss; allow yourself to feel it. As with any loss, you may go through a grieving process. In time, you will get to acceptance; take your time, acknowledge your grief and put it behind you. For some amount of time (it is different for everyone), you may want to work on accepting where you are right now. It seems inevitable that your mind will want to fill that extra time with “woulda, shoulda, couldas.” Don’t fall into that trap. The past is gone, the future has not yet arrived — you have only now.
Second, figure out what your next act is. Envision your life after leaving your business. Think about today: What do you enjoy doing in your spare time? What activities do you wish you had more time to pursue? What causes are you passionate about? Then, pretend it’s Wednesday afternoon, six months following the sale of the business, your perfect day in “retirement”: Where are you? What are you doing? Who are you with? What does it cost to do what you imagine you are doing?
Ask yourself the question, “what do I want to do when I grow up?” Then go out and do it. It’s a great idea to actually try out possible future activities before you sell your business. Giving an activity the proverbial “test drive” may help ensure that you’ll find it enjoyable and rewarding. After all, life is too short not to have a sense of purpose and self-worth, whether now or after the sale of your business. Only you can find your next act. Perhaps you will start another business, perhaps you will mentor young professionals or tradespeople, perhaps you will teach, perhaps you will run for office, perhaps you will volunteer for a worthy organization, perhaps you will serve on one or more boards of directors. There are many opportunities. Enjoy your life!
Don’t Do It Alone
Successful people have support networks. Groups of professionals, friends, business associates and others with whom they can discuss ideas, plans and goals. Business succession planning is no different.
If you are thinking about transitioning your business, haven’t thought about it or even if you don’t know where to start, we know one thing is certain - every business will one day transition. PNC’s Corporate Advisory Center, private business strategists, and Institute for Family Success are resources that you can use to help you think about this important, yet often ignored, topic.
If you have already sold your business, the PNC Private Bank has a team of officers who can assist you in developing and implementing your investment strategy, provide cash management tools and develop a financial plan to guide you into your future.
To access these or any other of PNC’s resources, reach out to any member of your PNC team.