Taxation & Estate Planning
Wealth management after liquidity events
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The total or partial sale of a privately held business - also known as a 'liquidity event' - is usually the culmination of years of hard work, considered risk taking, determination and tremendous energy. In many circumstances, the proceeds of the liquidity event may be sufficient to provide long term financial security to not only the business owners and their immediate family but also the next generations.

It is also often a time of powerful emotions, as the result of a lifetime of work changes hands.

Financial security does not always mean financial peace of mind, and it is for this reason that many entrepreneurs seek specialised, independent and dispassionate advice about:

  1. How to prepare for a liquidity event including maximising tax efficiency and net after-tax proceeds.
  2. How to sensibly invest, preserve and transfer the wealth which has been realised by the liquidity event.
  3. When and how to engage the family to form a shared purpose for part of the wealth and minimise the risk of the new-found wealth damaging family relations.

Key insights from the research

The content of this paper is based on a series of ongoing interviews conducted with Koda Capital's clients who have sold their businesses. It also includes input from their families and the corporate advisers who have assisted in the sale process.

The research highlighted the common wealth management concerns shared by entrepreneurs following the sale of their business and the critical role of specialised wealth management advice in addressing these concerns and providing the peace of mind to entrepreneurs as they enter their next phase of life.

The four key insights provided by the entrepreneurs interviewed fell into one the following categories discussed in this paper:

  1. The major issues do not change.
  2. The entrepreneur's investment mindset after the sale.
  3. The entrepreneur's intergenerational mindset after the sale.
  4. Financial security does not always mean peace of mind.

1.The major issues do not change

The key concerns identified were:
  • Tax management: The desire to maximise the after-tax value of sale proceeds
  • Investing wisely: The objective of protecting and growing sale proceeds sensibly
  • Family impact: Ensuring the family is not adversely affected by the proceeds
  • Giving back to the community: Potentially forming a framework to give back to the community based on the family's values. Perhaps unsurprisingly, these key concerns were evergreen and very much shared by the latest round of interviewed entrepreneurs.

2.The entrepreneur's investment mindset after the sale

The emotional intensity of the road to liquidity affects how entrepreneurs wish to approach their next life stage and, in particular, how they want to manage the wealth created by the liquidity event.

The business owners' typical journey to liquidity can be illustrated through the timeline in Figure 1. This timeline, which is certainly not to scale given the build business phase is significantly longer than reflected, provides some insight into the demands associated in successfully selling a business.

Figure 1: The entrepreneur's liquidity journey

Source: Koda Capital

The relevance of this context is that following the sale, a period of reflection needs to begin and a significant mental shift for the entrepreneur needs to occur—from one of, 'How do I make it?' to one of, 'What do I do with it?'

The entrepreneur has typically built their wealth through a single business which they have controlled. A sale opens new opportunities, including to 'de-risk' their wealth (through diversification), personally reset and invest their wealth in a manner which aligns with what is important to them.

Koda's research reveals that while most business owners understand this opportunity, a lack of understanding of what to do next combined with the challenge of releasing control, often led to two common adverse outcomes:

  1. An investment strategy which does not de-risk their position in the way they expected (in other words, a portfolio of good ideas rather than a good portfolio).
  2. A lack of diversification in the investment portfolio.

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