Updated April 2017 — Are you thinking of transitioning out of the company you own within the next two to five years? If so, you'll obviously have a lot of business-related planning to do as you arrange your exit. However, what you may not realize is that this is also prime time to start planning how you'll spend your personal time and manage your personal finances once you're no longer a business owner.
"If you wait until after the deal is closed to think about your post-business-sale life, you may miss out on some important opportunities," stresses Tracey Gillespie, Senior Business Planning Strategist, Regional Wealth Planning, Wells Fargo Private Bank.
To make sure you're well prepared for this life change, Gillespie encourages business owners to spend time several years before a sale takes place thinking carefully about what she calls the three Ls: lifestyle, leisure, and legacy.
"Ask yourself: 'How much will it cost to live the way I wish after I leave my business?'" suggests Gillespie. Perhaps your business funded your country club membership and paid for travel to conferences and meetings that you combined with leisure travel. Post-sale, you may need to cash flow those expenses yourself.
Many business owners end up spending more money after the sale than before — in travel, leisure activities, philanthropic ventures, and more. Your spouse/partner may have spending priorities you need to keep in mind, too, notes Gillespie. It's important to discuss these issues well before you leave the work world.
"Once you get a handle on your projected expenses, you can decide whether the [proceeds from the sale] of your business are sufficient to actually meet your personal needs," stresses Gillespie. First, determine the range of value for your business. After all, you may choose to transition your company to insiders, including management or family, which may net a lower price than an external sale. A business transition advisor can help you with the valuation and your wealth advisor or financial planner can calculate your personal spending needs.
By thinking about the financial details of your transition before it happens, you still have time to make other arrangements if you learn that your sale proceeds won't support the lifestyle you're planning. You might postpone the sale for a few years, build the company in a way that increases its value, or bring in an equity partner. A business advisor who specializes in exit strategies can help you analyze your options and the economic and operational benefits and risks.
"Once you sell your company, unless you go into business again, you can no longer endlessly refill your economic bucket. You now need to carefully manage the investments you have." — Tracey Gillespie, Senior Wealth Planning Strategist, Business Advisory Services, Wells Fargo Private Bank
It's challenging to decide how you'll use your newfound free time while you're knee-deep in your business transfer. That's why it's critical to do so in advance — and in conjunction with your spouse/partner or a business coach.
Why? "Say, for example, that you decide right after you sell your company that you want to spend a year teaching elementary children in Peru," notes Gillespie. "That may be impossible if you already agreed with your business acquirer to stay on for several years in a part-time capacity."
Leisure could also include buying a vacation home, starting a hobby business, and more. Those options all have price tags — and you're wise to financially plan for them before you agree to a sale price, says Gillespie.
How will you leave your mark on the world — and at what cost? You may wish to prefund your grandkids' college education, establish a family trust, or make bequests to your favorite nonprofits.
"Once you consider your options and add up the potential costs, you can choose the cash-flow and gifting strategies you may want to undertake," explains Gillespie. Some action items, such as transferring partial ownership of your business to family members or making charitable donations, might be best carried out while you still own your company, rather than after you sell.
Shifting to an investor mindset
One final factor Gillespie encourages you to consider before selling your company is shifting your mindset from being an earner to becoming a portfolio manager. "Once you sell your company, unless you go into business again, you can no longer endlessly refill your economic bucket," says Gillespie. "You now need to carefully manage the investments you have."
A big piece of this may be adjusting the amount of risk in your portfolio as you seek to maintain what you've secured. "You may not feel as comfortable watching the stock market shift up and down as you did when you knew you'd be working 20 more years," says Gillespie. Working closely with your financial team, you can begin shifting your risk profile to match your post-sale investor personality.
Because there are so many factors — personal and professional — involved in a business transition, you'll likely want to engage a whole team of professionals to help you. Some may specialize in issues related to the business sale, while wealth and wealth planning experts may help you explore your pre- and post-sale personal financial situations. Explains Gillespie: "Our goal is to help customers not just with the business transaction, but with the entire life transition. For most business owners, this is a once in a lifetime opportunity, and to help them get it right is important."