When individuals or families sell their businesses and suddenly realize that they are now wealthy, someone like Samuel Chinniah can help them plan what comes next.
His first advice: “Start planning before you’ve sold and acquired the money. The sooner you start planning ahead, the better.”
The rewards from an asset sale can be substantial, but the consequences of newly acquired liquidity can be unexpected, says Chinniah, senior family office advisor, financial planner and associate portfolio manager at CWB Wealth in Toronto.
Tax and other implications
“There are so many things that can go awry. For example, there are tax implications, and situations such as people imagining they would have more money than they received after taxes and expenses. There are family considerations too. And people also need to be clear about their short-term and long-term cash flow needs,” he says.
Chinniah says he likes to organize a “discovery” process with newly high-net-worth clients to help them determine their short- and long-term needs.
“I help them figure out what they’ll need for medical expenses, how much they expect to spend on their lifestyle needs, how much they should put into more conservative investments to make sure they have the cash flow they expect for the rest of their lives,” he says.
While planning ahead is critically important, there should be no hurry for the newly wealthy to move forward with their plans, says Eric Gilboord, business transition advisor and founder and chief executive officer of Warren Business Development Center Inc. in Toronto.
“I tell everybody that their first move after completing a sale should be to do nothing for six months,” he says.
“People who sell businesses often think they’re going to putter around the house after the sale, but they get restless and then they want to dive back in right away by investing in another business. That might make sense, but if it does, it’s better to wait a bit so you can figure out what makes the most sense,” Gilboord says.
‘Take a deep breath before you reinvest’
“Your team should include a financial planner, in my opinion, preferably a certified financial planner who can make fiduciary financial decisions in the best interest of you and your family. The next team member should be a lawyer who can handle estate and trustee issues,” he says.
“Your team should also have an accountant who can work with the other team members. It’s best to retain an accountant long before — even years before — your transaction that produces the wealth. You should work with the accountant and the team all through the transaction and for several years after the liquidity event has happened,” he says.
“Working with a team helps make sure you won’t make a gut decision without getting feedback from experts first,” Utarid says.
Planning ahead is critical
Being too slow with planning can have dire effects on a family, Chinniah says.
Suddenly he was diagnosed with stage four cancer and then there wasn’t much time to transfer the business and put together the assets for the family. Ultimately, his wife and kids didn’t have time to find a buyer and they had to simply wind up the whole operation,” he says.
People who do sell successful businesses should think about what kind of lifestyle they anticipate having after the sale goes through, Gilboord says.
“Sometimes you find yourself hanging around the house more than you expected. You can only golf so much, after all. After waiting six months, one thing successful entrepreneurs might like to do is to buy another business and go back to work part- or full-time,” he says.
Are you used to investing or new to holding cash?
Purchasing another business can be preferable to investing for some cash-rich sellers, he adds. “I find there are two kinds of sellers — one kind where they’re used to managing money and can be knowledgeable investors and the other where they are new to holding cash. The latter are more comfortable investing in a business,” Gilboord says.
Those purchasing new businesses should consider both companies that do work that is similar but not exactly the same as the company they just sold (as many sale agreements include non-compete clauses), he adds, as well as in completely different industries.
“If you have expertise in one field and you still want to work, you might as well apply it to other fields,” he says.
Another option for the cash-rich is to buy a package of several small businesses, which can be bundled as a single purchase by an intermediary, Gilboord adds. “You can manage the bundle like an investment and still be comfortable with the idea that you own a business,” he says.
Advisors who want to help
“You may have been dealing with a client who had $1 million in liquid assets and now that they’ve sold their business, they have $10 million or more. Are you qualified and ready to help? You want to make sure you are to get a seat at the table of the client’s team,” he says.
A good investment team needs to help clients manage succession plans for the new wealth, Chinniah says. “The kids and grandchildren may have other ideas for what to do with the money than you do, and it needs to be understood and discussed,” he says.
Whatever happens, managing assets after sale requires people like Chinniah to be as adept at soft skills as they are in investment management. “You have to be part psychologist and also be a family counsellor,” he says.
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