Prepare Yourself For Your New Financial Life   

By Rob Wrubel, CFP®, AIF®

Reports across the internet state that lottery winners are more likely to file bankruptcy within a few years of winning than the rest of the population. One study of Florida lottery winners says they are twice as likely to file bankruptcy as the rest of the population. We have all heard the stories of people receiving inheritances and blowing the money within a year. "Found" money is easier to spend than saved money, for most people.

You have spent your time, energy, money, and many sleepless nights building your business. You have taken the risk of being an entrepreneur and are looking forward to enjoying the rewards as you position your business for sale, or have a buyer already waiting in the wings.

Are you prepared to handle the money you will receive from the sale of your business? This will likely be the first time you have both time and money.

Most business owners start with little money, little time, and a passion for their work. During the course of building and growing their business, they might start to have money, but lack any time to spend it. Now, after a sale, they will have both.

Most entrepreneurs face the same issues as they look to sell their businesses - what happens next? What should they do first? How should they manage their capital during this initial transition phase and into the future?

There is a complex maze to navigate during the transition phase of selling a business.  Using the following steps will increase the odds of preserving and growing capital and increasing income over time. 

1.  Take a deep breath and take time to think.

Shortly after the sale, you will find yourself in an unusual position. You will not have to get up each day to manage the day-to-day operations of your business. Many people fill this time with expensive hobbies, gifts to family, and poor investments in other businesses. All of these activities can work for you (except for maybe the poor investments), but they need to work when you have a clear head and understanding of your own income needs. Give yourself a little money to go crazy with, but do not use enough to damage your own future.

2.  Build your team.

You should have a strong team in place already, consisting of your CPA, estate and business attorneys, financial planner, and others. You engaged a strong partner when you hired First Business Brokers to handle the transaction, and they can assist you in finding professionals to complete your advisory team if you need anyone further. You will need a sounding board. Many of us on the advisory team have multiple clients who have gone through business transitions, and you can discuss the issues and opportunities that come up with us.

Your team can provide significant help before the sale as you look to build assets, identify and fund tax advantaged assets, and use the business as a means to transfer wealth to other family members, charities, or anyone else of your choice. 

3.  Reduce debt.

We review our clients' balance sheets as part of the financial planning process. Often, entrepreneurs have personal debt associated with the growth of the business. A sale is an opportunity to improve one's personal balance sheet and reduce the risk associated with too high a level of leverage. Spouses and partners of the business owner usually want the security associated with reduced debt load and payments.

4.  Create a spending policy.

Spend time with a financial planner and your advisory team discussing your next set of goals. Previously, your focus was on the business. Now, you need to start to look at the other activities you wish to pursue. For some, it may be starting another business. For others, it could be maintaining their current lifestyles. Yet for others, it may mean dreaming big - travel, events, galas, etc. 

The financial plan helps you to understand the amount of income and principal you can expect to use, and will need to use, over the coming years or decades. You no longer have a business giving you a salary, profits, and benefits. Those items will be replaced with portfolio income, real estate income, or other more passively generated income sources. You will need to consider inflation and how that drives an investment portfolio. 

Take the time to understand the new issues you will face starting the day after you sell your business. You will want to manage your new assets like you did your business - for long term growth and prosperity. 

(originally published in the November 2011 eNewsletter)

Rob Wrubel, CFP,® AIF® is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences. Rob can be reached at (719) 632-0818 or RWrubel@ciginc.net