How a wealth advisor helps with investment strategy when selling a business

The massive turning point — and subsequent proceeds — of selling a business often leaves successful business owners wondering how to deploy new capital. While private ownership and any corresponding real estate makes up most of an owner’s net worth, the quick shift from an illiquid concentrated investment to cash can be unnerving without proper planning.

Owners should take an intentional, coordinated approach toward next steps after the close of a deal and resist the urge to move quickly. Some basic steps to a thought-out approach detailed below.

Begin with presale personal financial planning

A wealth advisor who understands the monumental shift of a business transaction can provide a holistic view of the process, helping you set goals and implement a comprehensive wealth management strategy prior to selling the business. Having your team in place well in advance of a transaction and engaging in preplanning can help you leverage your post-sale liquidity to achieve your financial goals, as well as identify other strategies that align with your desired legacy.

Shifting from a balance sheet that included ownership in a privately held business to one without can be overwhelming. Adequate planning can help address how to allocate between different buckets and assess what a potential investment strategy might look like. A well-defined process to help determine your investment objectives involves understanding the concepts of:

• Lifetime consumption
• Multigenerational and philanthropic legacy

Lifetime consumption

Start by assessing what you expect to spend during your lifetime based on your financial goals and objectives.

Multigenerational and philanthropic legacy

Establishing multigenerational and philanthropic goals could help you to design an investment strategy to meet the objectives of each. For example, a trust that funds educational expenses for multiple generations of family members will have a different investment allocation and risk profile than a charitable remainder trust that pays income to an aging parent during their lifetime.

Design and execute an investment strategy

After going through the personal financial and estate planning process to determine structure and goals, an investment allocation should be determined for each structure or entity. The mix of investments will be different for each family based on the makeup of your balance sheet, current private market exposure, risk tolerance, and goals.

Typical investment portfolio buckets and objectives

• Lifetime consumption or lifestyle portfolio: Income generation and capital preservation
• Opportunistic — dry powder — portfolio: Income generation and capital preservation
• Privately held business and related private investment portfolio: Concentrated risk, higher expected return, uncorrelated sources of return, diversification, and capturing illiquidity premium of private capital
• Globally diversified public market portfolio: Long-term capital appreciation and long-term total investment returns
• Legacy and philanthropic portfolio: Balanced portfolio, liquidity for current donations, fixed income maturities for gifts in the short term, and equities for long-term tax-exempt appreciation

Asset class allocations

The resulting mix of investment strategies within a portfolio should be determined based on the overarching risk and growth objectives.

Most asset allocation strategies look across the universe of investments in both public and private markets. It’s important to understand both in order to better value opportunities across the spectrum.

Public markets

Public markets are investments issued or traded on the public markets.

Private markets

These are privately originated or negotiated investments, outside of publicly traded investments such as stocks and bonds. These are available only to investors that meet specific financial requirements and can manage the inherent risks and illiquidity of private securities.

Having the right asset allocation is important. This means combining investments with an overarching strategy to improve your asset allocation and potentially mitigate your overall risk exposure while seeking long-term returns. When including private investments in the investment plan, it’s particularly critical that the liquid investment portfolio be appropriately structured and include illiquid, higher-risk private securities.

Develop an investment strategy policy statement

Similar to how your strategic plan guides your organization, the investment policy statement is the strategic plan for your entire investment portfolio. It’s a guide for defining the parameters of your overall asset allocation, investment selection, and maintenance strategy. It also works as a customized framework for tracking, monitoring, benchmarking, and pivoting according to your financial needs while considering the constraints of the market.

Other benefits of an investment policy statement are that it:

• Segments liquid assets into buckets based on their time horizon for use
• Quantifies acceptable levels of risk and monitors
• Streamlines portfolio management
• Incorporates tax planning and efficiency
• Documents decision-making processes
• Benchmarks progress

Additional considerations

Tax efficiency

You should carefully evaluate your tax situation as part of a comprehensive investment strategy. Tax efficiency is an especially important consideration when constructing a portfolio.

Patience

There will be times when short-term investment make sense, but the most successful portfolios tend to be planned for the long term. The day-to-day fluctuations of a liquid investment portfolio can be difficult to adjust for business owners who aren’t used to seeing their net worth change every day.

Control

Many owners, having been involved with the day-to-day operations of their business, want to maintain a similar sense of control over their liquid investments. It can feel uncomfortable to rely on a wealth advisor to oversee something so critical. Outsourcing investment management to a professional fiduciary advisor, however, can allow owners to focus on other meaningful things, post-transaction.

Monitor and adjust with a wealth advisor

A comprehensive investment strategy can allow you to better monitor your progress toward your overarching goals, and a wealth advisor can help monitor investments while recommending changes to keep them on track. Partnering with an advisor to develop and implement an investment policy statement can guide portfolio reviews on a regular basis. Adjustments can be made based on predefined levels of risk, expected results, and changing life events and priorities.