Selling a business and handling the transition to life beyond running a company might and often is the dream of many founders who have worked hard to build their organization. But the transition can be a jolt for those who haven't planned it thoughtfully. What considerations should apply?

Selling a business and figuring out what to do next is a challenge that can be a shock to those who haven’t given the matter much thought. A person who has worked hard to build and run a firm, investing time, emotion and resources into an operation spanning decades, can struggle to adjust once he or she sells the business, or floats it on the stock market. This transition from business to liquid wealth is one of those punctuation points in a person’s life that wealth managers can help.

Consider some context: Figures on the number of firms sold by owners can be hard to pin down, but there are some indicators. For example, a total of 10,312 small businesses changed hands in 2018, according to Small Business Trends (January 27, 2019). In total, there are 30.7 million small businesses in the US (source: Small Business Administration, 2019). In the US, definitions of “small business” can vary by sector. The SBA said that in the third quarter of 2017 – to pick one period of time – there were 226,000 business exits, against 241,000 start-ups. And, given the impact of COVID-19 and other developments, the number of firms changing hands will continue to be substantial. 

In this article, Jim Fitts, principal and managing director of business owner services at The Colony Group, a wealth management firm spanning the US, discusses the what's involved. (This publication has interviewed The Colony Group before about its own business model.)

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply. Jump into the debate! Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

When presented with the opportunity of selling their business, many business owners come to realize that they haven’t put much thought into what comes next.

Take the story of a couple who owned a specialty medical device manufacturing company.

They often received inquiries about selling their business but had never been too interested. They had a comfortable lifestyle and enjoyed their work. The business produced great cash flow, the management team was strong, and it ran smoothly without a lot of oversight from them. All of this allowed them to spend more time away. Why sell when things were going well?

However, once they received a serious offer from a larger firm that was far more than they had realized their company was worth, they wondered if indeed it was time. 

Unfortunately, the owners were ill-prepared to evaluate the decision to sell. More than any other reason, they had no idea whether the sales price offered was enough to sustain their lifestyle, what other goals were important to them, or what they would do every day without a business to run. The prospect of stepping away from something so close to them into a foreign life was frankly frightening.

This feeling is universal regardless of how much wealth is involved. Every business owner is anxious about what comes after a business sale. Whether it is fears of running out of resources and failing to preserve wealth, or even concerns about maintaining family relationships when contemplating a sale, anxiety about the future can often short-circuit the process, or at least make it an experience to be avoided for as long as possible.

Fortunately, there are key steps you can take to address the various anxieties of a business sale and build confidence about the future and the ability to sustain your chosen lifestyle. They all are rooted in planning, trust, and time.

Define the future
It is the lack of a defined destination that often makes a business sale most daunting. The business often defines the owner’s identity and when that is gone, the owner can feel cast adrift without the business frame of reference to anchor their sense of self. But what would happen if the future were clear, their role defined, and their prospects varied and exciting? Having a destination to move towards replaces the business you are moving from, altering your mind-set and giving you a future to plan around. Only with a clear idea of what the future looks like can you test the assumptions necessary to make it happen.

Determine the costs of the future
The next step is to determine the true cost of that future: what cash flows will be necessary throughout your life and when they will occur. In addition to whatever you assume for your annual lifestyle, this is where larger, deferred goals can be identified. Examples we have seen include the vacation house or a new home, the blue water capable catamaran, or the seed money for a new business that has grown out of a hobby. Being honest about what you need to be happy will allow your advisors to assist you in working toward these goals.

Maintain professional counsel
When running your business, you relied on others with different expertise to handle business elements that were not your strengths. Taking the future you have planned, and determining its feasibility, is where a financial and investment advisor fit in. They will test your plan against all available resources and recommend strategies that tie most closely with your goals. In this process you must be the discerning CEO and seek enough information to be confident in the recommended plan. The key variable to negotiate is the amount of risk you are willing to take, but to do that you must have a clear understanding of what risks are realistic versus those that are exaggerated, and how those risks may be mitigated. You do have control over how your wealth is put to work, and the decisions you make in concert with your advisor’s recommendations will determine what level of spending is sustainable and how your goals may be realized.

Divide investments to minimize risk
An effective strategy for some is to bifurcate investments into buckets for different purposes. This allows the business owner to accept more risk for a portion of their wealth (and thus the prospect for greater return) because they have a separate and well-established bucket of low risk, safety assets intended to sustain them comfortably regardless of what else happens. The reduction in anxiety this structure provides should not be underestimated. It can also be a useful bridge between the initial investment plan adopted shortly after a sale, when concern about losing hard-won capital is greatest, and an evolved plan some years later when the owner has more experience with living off investment performance.

Life post-sale
A final note about having a sense of security post-sale. Security is not only financial, but it also is tied to identity. In addition to the financial considerations we have reviewed, redefining your identity and building a purposeful life is key. What will be the essential intent of your post-sale life, and is it well represented in the lifestyle you seek to sustain? This may take time to come into focus, and the answer may morph into unexpected directions as you settle into your future. Give yourself permission and the space to experiment.

Now that you have a glimpse of a thoughtful and tested process, you may wonder what happened to the business owners in this story? That is still a work in process. They did negotiate the sale after confirming that the proceeds were sufficient to meet all their needs but are now in a period of hibernation. They did not take the time to define their post-sale life and as a result are experiencing some loss of purpose. They are finding that travel and golf are not fulfilling and are struggling with what may come next. Still, spring is coming, and they are optimistic about figuring out the future.

About the Author
Jim Fitts, CFP® is a principal and Managing Director of Business Owner Services at The Colony Group, a wealth and business management firm managing approximately $13 billion in assets for clients. He is the co-author of Your Next Adventure: Planning for Life After the Sale of Your Business and has extensive experience in assessing personal and business financial positions and advises family-owned businesses on ownership and management succession.