By Michael G. Skowfoe
Like many business owners, you’ve probably spent a lifetime with your head down, focused on building enterprise value. This focus may have come at the cost of focusing on your personal affairs, only to find yourself with a potential sale on the horizon, forcing you to think about, “Is this enough, and can I maintain my lifestyle after selling my business?”
You need a solid understanding of how much money there is and what you want to do with it to answer that question. Often, that requires slowing down and working through some of the issues that accompany sudden wealth from a business sale and thinking objectively about the impact of the windfall. What does it cost for you to live your ideal life? Let’s break this down to a few key areas.
Lifestyle and Financial Goals
After the sale of your business, will any financial or lifestyle goals impact the proceeds from the sale—for example, where you live? Are you comfortable in your current residence? Or do you plan to upgrade or downsize or even buy a second home?
What impact will that decision have on the proceeds from the sale of a business? Do you have an idea what it would cost to relocate? What it would cost to maintain a second home? Is this cost feasible?
Another area is hobbies and personal interests. Now that you have more time on your hands, will you dedicate more time and financial resources to these hobbies? Do you play golf or tennis, hunt, fish, or do anything else that should be included in the budget?
Do any of these activities include memberships and dues? Do you have a boat or aircraft to maintain? What are the costs? Are any of your costs part of the fringe benefits within the business that you now need to absorb personally?
Are there any new endeavors and personal interests you’d like to pursue, and what are the costs involved? Another area to consider is travel and whether it is important to you. Do you have an annual travel budget? Do you have any special trips or vacations that you’ve been unable to experience because of the time dedicated to running the business? What would those costs be, and should they be added to the annual budget?
Health Care and Insurance
How will you deal with health and various insurances? We all know that without good health, little else is meaningful and enjoyable. What do you currently do to maintain good health? What can you do in the future?
You’ll want to look at the cost of securing health care insurance if you’ll now absorb this personally, assuming you’re not of the Medicare age eligibility. Have you thought about the impact of long-term care costs on your financial plan? Do you have long-term care insurance? Is it applicable to your situation?
Family Support and Family Dynamics
Another area to consider is whether you provide financial assistance to anyone within your family—for example, your children or grandchildren. If your parents are alive, are you responsible for making sure they’re provided for?
Have you considered the cost of college, if that’s applicable, or private school funding? Do you want to fund any college savings plans for either children or grandchildren?
Do you need to help with any major purchases, such as down payments on homes or the purchase of cars for family members?
A big financial windfall, such as a business sale, can take a toll on relationships. Excessive spending and other poor financial decisions can erode sudden wealth from the sale of a business faster than you think. It becomes crucial to assess your situation clearly, perhaps with the help of professionals, to make smart decisions about the proceeds from the sale of your business.
Another area to consider is religious, philanthropic, and community involvement. Do you have significant ties to any religious affiliation? Should that affiliation be factored in as part of the sale proceeds from the business? Is it an ongoing commitment, and what is the cost?
Do you have any charity or philanthropic endeavors you would like to support? Should they be factored into the financial plan?
Finally, a key area to consider is replacing your income. So you’ve received the sale proceeds from the sale of the business. And as a financial advisor to business owners for 20-plus years, I often ask the business owner, “How will you live off these assets?”
The simple math is to take the amount of the sale proceeds and divide it by life expectancy. But the challenge here is that the simple math isn’t mindful of inflation. The value of your money is roughly worth half in about 20 years. Inflation is a silent killer, and it needs to be accounted for.
As you decide how to replace your income, you’ll want to consider investments. Will you invest the proceeds? How will they be invested? Have you ever invested before? Are you comfortable with risk? Do you know what your risk tolerance is? Have you considered whether your existing team has the expertise to deal with the complexity of your situation, or do you need to interview other wealth managers?
Unfortunately, investment decisions about the money from the sale are often overlooked because entrepreneurs and business owners are intently focused on getting the transaction done. A huge influx of cash on the sale of a business can be problematic. If not handled knowledgeably, there’s a possibility of serious implications, such as outliving the assets due to ineffective investment management or paying excess taxes that could have been avoided.
The Value of a Stress Test
All of the above factors emphasize the importance of a stress test for your financial plan to make sure that it will actually deliver. Stress-testing your financial plan is a technique that trials your assumptions. Will your plan carry out as intended?
A stress test is a second opinion, if you will, that looks at all the components of your financial life. It helps answer whether your goals for the sale proceeds are attainable. Testing the assumptions of a financial plan, product, or service can help confirm that it’s right for you or identify ways it could jeopardize your goals and put you at risk.
High-level stress testing involves a systematic process that examines goals and changing scenarios and costs to determine the right course of action for you and your family. If any gaps or obstacles stand in the way, you can assess what you should do to make sure that you’ve got the financial security you desire.
You’ve worked hard to get to the point where you’re rewarded from the business sale. It’s essential to make sure that your life’s work is protected to provide the lifestyle you desire. The stress test can help accomplish that.
These are some of the considerations that one should consider when asking the question, “Can I maintain my lifestyle after selling my business?” There are many different approaches to managing money and many factors that need to be considered to find the appropriate approach and team that suits your needs. It’s vital that you have confidence in your team and how the money is managed to achieve the results you are looking for.
I’d encourage you to reach out to a financial professional who has experience in working with business owners in the transition and exit of their business. With careful planning, the right advisor can help you identify where you are today, where you’re trying to go after your successful exit, and any obstacles that stand in the way to ensure that you can maintain your lifestyle post sale of the business.
We offer an introductory call for business owners ready to transition their business. Get in touch with us for a complimentary consultation.