Getting to this point can be an emotional rollercoaster, writes Mayur Lakhani, executive director, specialist wealth team at London & Capital.
In addition to the financial choices entrepreneurs must confront, they are also asking themselves, what next? Followed by, where do I go from here?
This liquidity event may provide them with financial freedom, but at the same time they may feel a loss of power and the daily satisfaction of managing a business.
Ups and downs
As wealth managers, it is our role to provide these clients with guidance through both the emotional and financial decisions that lie ahead.
There is no doubt they will face a huge lifestyle shift, with some embracing retirement and others looking for the next venture or investment opportunity.
But it goes beyond that.
Along with their personal journey, they also need to consider the impact this wealth may have on their children, the legacy they leave behind, and the intergenerational planning that it creates.
So how do we work with these clients? First and foremost, it’s crucial that we forge a strong relationship early on. Most entrepreneurs will have spent a lifetime taking risks to build their businesses and being actively involved in all professional and investment decisions.
Therefore, handing over control to a wealth manager requires a great deal of trust, and is a major step for them.
From here, our focus is on gaining a holistic view of the client’s circumstances, including the aspirations they have in their personal and family life, as well as their total wealth picture.
Most entrepreneurs have put so much time and effort into building their business that holistic wealth planning rarely crosses their minds. With their entrepreneurial efforts providing them with a generous living, they may not have planned for life outside of their business, let alone think about what income they will need when they retire.
One thing we often discover with business owners is that they have done little to no long-term investing or tax planning over their careers.
With their business being their primary focus, they won’t have put much thought into matters such as pension saving or tax-efficient planning. In some cases, capital markets are an entirely new concept and their approach to equity and bond markets is significantly more cautious than their approach to business.
Five key questions
Yet after the sale of a business, wealth planning must be a priority.
The way a company is sold will determine if it will take place in stages or involve interim payments. Timing here is vital, because if the entrepreneur waits until the liquidity event before planning, they may have un-utilised capital that will not be placed to work, which ultimately may have a detrimental effect on their long-term financial goals.
This is why it’s important to have these discussions with clients as early as possible in the process. For instance, it is in the time leading up to the liquidity event that important questions need to be answered:
- Do they intend to continue working or are they retiring?
- What kind of lifestyle do they want to have after selling their business?
- Do they want to set anything aside for children or grandchildren?
- Do they intend to make charitable donations?
These discussions will help when building a holistic wealth plan and an investment portfolio that will evolve to meet their changing needs as they make the transition out of their business.
They will also help formulate longer-term plans too.
Quite often entrepreneurs face a conflict between funding their lifestyle, helping future generations and investing in new ventures.
By having a deep discussion about these goals, you will be able to determine where their main priorities lie. For example, we frequently find business owners want to share their wealth with children and build a lasting legacy.
The wealth manager’s role here is to help clients determine how and when wealth will be passed to the next generation most efficiently, and provide assistance in educating the wider family on the wealth they possess and the impact it may have on their lives.
As wealth managers, having a deep understanding of the challenges that business owners face gives us an advantage when helping them plan for life after exit.
A liquidity event may present an entrepreneur with the biggest decisions they will ever make, and it is important that we are able to provide them with the answers and guidance they need.
This article was written for International Adviser by Mayur Lakhani, executive director, specialist wealth team at London & Capital.