Nov 29, 2022
How to invest after the sale of the business
Seeing an eight-figure number appear in your bank account likely is life-changing, yet it may also be paralyzing in some ways.
When you own a business, you may feel like you control your future. After selling the business, your focus can quickly shift to the proceeds of the sale. You might ask questions like: “Will it be enough?” and “What should I do with it?” Fear, uncertainty and doubt may begin to fill the void where the control of your business once resided.
Through our team’s work with hundreds of business owners, we’ve discovered three noteworthy principles that we think instill confidence—not confusion or anxiety—in your post-exit investment strategy.
A balanced approach
Your post-exit investment strategy must be able to satisfy your demands for today without sacrificing your needs for tomorrow.
Investors often play a perpetual game of emotional tug of war. In good times, greed tells you to go “all in.” In bad times, fear says to “sell it all.” And the pendulum keeps swinging, never finding a proper balance.
To find balance, consider segmenting your portfolio strategies. Your portfolio can address each of your immediate, intermediate and even generational goals. Generally, a properly balanced portfolio that’s based on your time horizon and risk tolerance will look something like this:
- One to two years of withdrawal needs in cash
- Two to five years of withdrawal needs in bonds
- Excess positioned for growth via a diversified equity (i.e., stock-based) strategy
Prepare for shocks in the market
Predicting the severity and timing of market shocks might be a fool’s errand, but trying to plan for them is prudent because, over time, they will occur. We believe that maintaining a margin of safety is the first step in preparing for inevitable market cycles and shocks. Holding too little cash likely fails to provide the flexibility needed when economic turmoil happens.
In high-stress times, we often need “emotional space” to make wise decisions. While holding one to two years of expenses in cash may seem conservative, having liquidity in a receding economy can buy the emotional space to make intelligent decisions. Without this space, many become prone to panic, and unnecessary investment losses may ensue.
Alternatively, having exposure to investment assets with high growth potential might offset the slow erosion of your cash’s purchasing power. While interest-paying investments like bonds can be helpful for an intermediate period, they may not help protect your purchasing power over long periods.
Unfortunately, our experience tells us that in the search for growth potential, many business owners fall victim to “familiarity bias” and overinvest in a specific asset class, geographic region or even individual company.
Diversification is an established principle of thoughtful investing. Investing broadly across many asset classes, styles, countries and sizes of companies may not lead to extraordinary returns. But why risk what you have and need for what you don’t have and don’t need?
You can never be sure a particular investment will outperform all others. But you can be sure that a collapse could shatter your financial future if you are overallocated to one specific sector or company.
Yes, you likely won’t fully benefit from the meteoric rise of the new darling tech stock or other “flavor of the day.” But your portfolio also likely won’t be fully devastated by any meteoric crash. In our opinion, prudent investors diversify and aren’t distracted by front-page headlines or “hot tips” trending on social media.
Time is scarce. You understand this intuitively when you own a business. Every minute you spend working on your company creates value. But after you exit your business, your time is just as valuable. And post-sale, you’re tasked with how to invest both your money and your time.
A few years ago, I met a former business owner who had sold their business a few years prior. He redeployed about $3 million of the proceeds into another venture. He was pretty proud of his investment. It produced about $300,000 worth of cash flow each year—a 10% annual return.
But this entrepreneur missed something in his analysis: the value of his time, which may have been even more valuable.
Being highly skilled, he could have easily obtained a job working 30 hours a week, earning at least $240,000/year. In an average week, he was spending about 30 hours on the new venture. Factoring this in, the first 8% ($240,000/$300,000) of his profit can be seen as a return on his labor, not a return on his investment. His investment return was only 2% when viewed through his lens. He could have invested in no-risk Treasury bonds and done just as well.1
Alternatively, what if you could spend 10 hours of your time finding an investment guaranteed to return 20% in a year? That’s a proposition worth considering. What if that investment also had a $5,000 maximum investment cap, such that the max payout in a year is $6,000 ($5,000 investment plus the 20% return)? Investing just $1 million would require 200 of these investments.
Two hundred of these investments at 10 hours each would require 2,000 hours a year. That’s a full-time job. Furthermore, your return for all this effort would be 20% on your $1 million investment, or $200,000. As in the previous scenario, this $200,000 has become, what could be viewed as, a return on your labor, not your investment.
In our assessment, to be profitable, an investment must be scalable. As an investment requires more of your time, it becomes less scalable and less profitable.
What’s your plan?
Selling your business is sure to elicit excitement, pride and satisfaction. Investing the proceeds can often trigger stress and anxiety. Don’t let the flood of decisions keep you from taking action or, even worse, lead you to take potentially harmful investment actions.
We’ve worked with many owners to implement a principled plan for the next phase. Creating and executing an intelligent post-exit investment strategy can help you worry less, live more and focus on what matters most to you and your family. So, what’s your plan? We’re here to help.
ABOUT THE AUTHOR
Nathan Corbitt, CPA, CFA, CFP, CExP
As a business owner, I have experienced the challenges business owners have faced over the last three decades. This has fueled my passion for seeing business owners succeed.
As former college athlete, I can tell you that no winning team enters a game without a game plan. Unfortunately, most owners never document their business' game plan. This leads to a lack of vision and poor execution and is why only 3% of business owners achieve an ELITE exit.
At The Business Owners Transition Academy, we use a proven 5-phase process and I.M.G.O.O.D. ChecklistTM to help business owners increase the value of their business, on their terms and without regret.
I've partnered with business owners in nearly every market segment and in all phases of the business life cycle, from start up to enterprise values exceeding $100M. I've witnessed how these owners are empowered by creating and executing their game plan, watching the value of their business is grow and ultimately achieving their ELITE exit.
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