Selling a business can create an unusual problem.
For years, perhaps decades, most of your financial life revolved around one company. Your wealth was concentrated in a business you understood intimately. You knew the customers, the employees, the competition and the risks. You were actively involved in creating value.
Then you sell.
Suddenly, a large portion of your wealth may be sitting in cash or marketable investments. Instead of managing a business, you’re now in the wealth management business.
They require very different skills.
For an entrepreneur who’s recently sold their business, I don’t think the first question should be,
“What should I invest in?”
A better question is:
“What do I want this wealth to accomplish?”
From there, you can start building a wealth-management system around the answer.
1. Start by defining the purpose of your wealth
Before designing an investment portfolio, write down a few basic goals.
They don’t need to be complicated.
For example:
- Live comfortably from your investment income.
- Maintain financial independence for the rest of your life.
- Build wealth that can eventually benefit your children or future generations.
- Keep some capacity available for future entrepreneurial opportunities.
- Support charities or causes that are meaningful to you.
- Create enough organization that your spouse and family understand the family’s financial position.
Once you know what the money is for, many other decisions become easier.
Your investment portfolio should ultimately be designed to serve your life and not the other way around.
2. Create an Investment Policy Statement
One of the most useful documents a wealthy investor can create is an Investment Policy Statement, or IPS.
An IPS is simply a written framework for how you intend to manage your capital.
This document might include:
- your objectives;
- required income;
- time horizon;
- risk tolerance;
- liquidity requirements;
- target asset allocation;
- benchmarks;
- tax considerations;
- rebalancing rules; and
- how investment decisions will be made.
Here is a sample Investment Policy Statement as an example.
The purpose of an IPS isn’t to predict markets. Its to create some discipline.
A good IPS changes the question from:
“Did my portfolio go up this year?”
to:
“Am I following my strategy and making progress toward my long-term goals?”
and
“How does my performance compare to a benchmark?”
An IPS can also be an excellent tool for managing advisors. The sample IPS we use, for example, explicitly connects investment objectives with diversification, benchmarks and ongoing reporting.
3. You don’t necessarily have to choose between managing money yourself and hiring an advisor
Entrepreneurs are often capable people who are accustomed to making their own decisions.
After selling a business, some naturally gravitate toward a self-directed brokerage account or funding new ventures. Others immediately begin interviewing wealth-management firms.
I don’t think this needs to be a binary choice.
There is nothing inherently wrong with managing part of a portfolio yourself.
For example, an investor might feel comfortable owning broad Canadian, U.S. and international equity ETFs without paying an advisor to manage them.
At the same time, an advisor might be useful for other parts of the family’s financial life:
- fixed income;
- alternative investments;
- registered accounts;
- private banking;
- retirement or estate planning;
- tax coordination;
- liquidity planning; or
- simply acting as an experienced sounding board.
The question isn’t necessarily whether to use an advisor.
It is where an advisor adds enough value to justify using one.
4. Build a wealth-management team
As wealth grows, having a small wealth management team is usually prudent.
A relatively simple wealth-management team might include:
- an accountant;
- an investment advisor;
- a lawyer (occasionally); and
- the investor themselves.
For more complicated families, that circle can expand to include bookkeeping, consolidated investment reporting, estate planning, insurance, tax specialists and family-office support.
But there is an important principle:
The advisors work for you.
You should understand who is responsible for what, what you’re paying, and how each advisor contributes to your overall goals.
Don’t assume that your accountant or investment advisor will automatically identify every issue affecting your family.
Good advisors can be extremely valuable. But the investor still needs to direct the team.
5. Build good reporting before you think you need it
This is one of the least exciting aspects of wealth management, and one of the most useful.
Initially, you might have a holding company and a couple of brokerage accounts.
Ten years later, you could have:
- accounts at several financial institutions;
- a holding company;
- registered accounts;
- real estate;
- private equity or venture investments;
- private credit;
- cryptocurrency;
- charitable assets; and
- interests in another operating business.
Suddenly, answering the simple question “How did my portfolio perform last year?” isn’t so simple.
Individual wealth-management firms can give you excellent reporting on the assets they manage. But they generally don’t have the complete picture when assets are spread across multiple custodians and structures.
That’s why consolidated reporting can become important.
We use Addepar, a platform designed in part for family offices and complex investment structures. Addepar is a family-office reporting tool as capable of modelling structures that include holding companies, trusts and philanthropic foundations and consolidating information for reporting and analysis.
Whether you use Addepar or another system isn’t the main point.
The principle is:
Create a source of truth for your family’s wealth.
Good reporting helps you make better decisions. It can also make it much easier for a spouse, children or future trustees to understand the wealth many years from now.
6. Be careful about investing your fortune in your next business
This can be a particularly difficult adjustment for successful entrepreneurs.
You became wealthy by concentrating your time, energy and capital in a business.
So naturally, when the next idea comes along, you may want to do the same thing again.
But your circumstances have changed.
Once you have accumulated enough capital to create permanent financial independence, that capital has enormous optionality.
Think carefully before putting a large portion of it back into another operating company simply because you can.
There are alternatives.
You can raise outside capital, bring in partners, start small so you can bootstrap.
In fact, requiring a new business to attract investors, generate customers or fund itself can impose useful discipline.
Entrepreneurial capital and family investment capital don’t necessarily have to be the same pool of money.
7. Understand the enormous advantage of time
For younger entrepreneurs in particular, time can be the most valuable financial asset they possess.
You don’t necessarily have to take extraordinary risks to build substantially more wealth.
If you have significant starting capital, a long-time horizon and relatively modest spending, avoiding major mistakes may be more important than finding spectacular investments.
8. Think about philanthropy earlier than you think you need to
After a business sale, conversations naturally revolve around investment management, tax, estate planning and protecting the capital.
One subject that can get overlooked is philanthropy.
Philanthropy can certainly be about giving money away.
But for wealthy families, it can also lead to much bigger questions:
What is this wealth ultimately for?
What do we want our family to contribute?
How do we teach our children that wealth comes with responsibility?
You don’t have to establish a private foundation the day after selling your company.
In fact, there may be great value in taking your time.
Spend a few years learning.
Meet charitable leaders.
Make some grants.
Figure out which issues genuinely interest you.
You might become passionate about entrepreneurship and economic opportunity, healthcare, education, religion, the environment or something you haven’t encountered yet.
Your philanthropic strategy can develop alongside your investment strategy.
9. Eventually, your biggest challenge may be passing on responsibility (not money)
If you’ve recently sold your company and your children are young, succession may seem impossibly far away.
It isn’t.
If you’re successful at investing your capital, the wealth your children eventually encounter could be considerably larger than the wealth you have today.
The challenge isn’t simply deciding how much money to leave them.
It is preparing them to deal responsibly with it.
That takes years.
Children can gradually learn about saving, investing, charitable giving, businesses, taxes and family decision-making.
Eventually, they can participate in meetings and take responsibility for small pieces of the family’s financial affairs.
Good reporting, documentation and governance make that process much easier.
10. Remember what made you successful in the first place
Selling a business can represent the culmination of years of work.
But financially, it can also be the beginning of something much longer.
The skills required in the next stage are different.
You no longer need to maximize every opportunity.
You don’t need to have an opinion on every stock, and you don’t need to find the next home run.
Instead, wealth management becomes an exercise in discipline:
- Live within your means.
- Diversify.
- Create a plan.
- Measure your results.
- Choose good advisors.
- Protect yourself from large mistakes.
- Stay entrepreneurial without unnecessarily risking your financial independence.
- Teach the next generation.
And think carefully about what you ultimately want your wealth to accomplish.
For someone who has recently sold a successful business, those questions may matter far more over the next 30 years than which investment happens to outperform next quarter.
