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Rewards come after the reaping
By Charles Batchelor
Published: June 10 2005 14:53 | Last updated: June 10 2005 14:53
Having more money than you have ever had before may not appear to be a problem. But for entrepreneurs who sell their business, managing this new-found wealth can pose a tremendous challenge. Running a business can be hard enough but selling up brings a whole new set of problems. True, they are the problems associated with suddenly having a lot of money but they can be no less stressful
Mergers and acquisitions activity among the larger quoted groups has been through a downturn but there is a constant turnover among smaller quoted companies and private businesses.
Just 8 per cent of UK business owners expect to pass their businesses on to the next generation while 58 per cent expect to dispose of the business by means of a trade sale, according to a survey by Grant Thornton, the accountancy firm. Globally, 28 per cent of businesses are expected to remain in the family – with 23 per cent changing hands by way of a merger and 20 per cent throughby a trade sale. This still means a lot of company founders will be coming into large sums of money.
“These people have been very successful business owners n a fairly narrow area and suddenly they are faced with a great deal of liquid wealth,” says Ian Partridge, founder of Loedstar(yes), a Geneva-based training company for wealthy business owners.
“It is a completely new situation for most of them because their wealth has been in the business and they have been relatively cash-poor. The big question they face is how to preserve that wealth for the long term, or until another opportunity comes along.”
Of course they could go on a spending spree: The temptation for some is to splash out on items of conspicuous consumption – one adviser recalls urging one client that five private aircraft was slightly over the top. Others back their sporting interests by investing in their local football club, for example, despite the game’s reputation for swallowing up itsbackers’ money.
Others plunge back into investing in other people’speople’s businesses – on the grounds believing that they understand how business works – without realising that the mechanics of this sort of investment are very different from running your own show. “You are not in control and you are not there every day,” says Mike Warburton, tax partner at Grant Thornton. “However good you may be, management always has the upper hand in terms of information.”
One of the challenges facing the newly wealthy business owner is that the run-up to the sale will have been a period of unprecedented activity: negotiating with bankers and lawyers as well as attempting to the keep the business running normally.
Occasionally an entrepreneur will have found time to work up a strategy. “Some people know exactly what they want and come in with five A4 sheets of plans,” says Nick Tucker, head of UK global private clients at Merrill Lynch. But most will have had little time to think about what comes next. afterwards.
“The client needs to find a home for the money, park it and let the dust settle,” advisessays Phillip Wood, director of personal financial planning at PricewaterhouseCoopers. “We would be looking for somewhere with easy access to the money and a decent rate of interest.”
A n earlypriority is to set funds aside to meet anytax liabilities. “It is psychologically important to set money aside in a separate account,” says Wood. “If it is ring-fenced it will not get confused.
“Then I tell my clients to do little in the short-term. They need to ask themselves: what do I need from the money? Do I need income and if so, how much? What risks am I prepared to take? They need to develop a financial plan. It can take up to 18 months for people to realise what they want.”
Some entrepreneurs continue the risk-taking strategies that have helped them to build successful businesses. But others are happy for want a change in pace and want a safe home for their money with a minimum of risk. Structured products that provide a guarantee to repay the principal investment – though often with a cap on the upside – are onea popular form of investment.
Most entrepreneurs will probably need to take income from their newly- acquired wealth but they may have other objectives as well: passing on giving some of their money to their children or giving away some to good causes. If the children are to have some of the money, should it be a direct gift or go into a trust fund for when they are older and wiser?
Advisers stress that sSorting out these issues involves more than simply just financial matters. “It is a very personal discussion,” says Merrill Lynch’s Tucker. “It can be difficult if the client does not want to talk about that. They say: ‘I want you to talk about my money.’ But we need to understand what they need before we can go on to structuring a financial plan.”
Part of the planning involves understanding what returns can be obtained from investing. Entrepreneurs who made double-digit returns from their businesses are often reluctant to accept that in current equity and bond markets a diversified portfolio will not deliver such stellar returnsperformance.
“I can remember people coming through the dotcom boom asking us if we could double their money over the next 12 months,” says Rupert Robinson, managing director at Schroders Private Bank. “Expectations of what is achievable have become more realistic.”
Entrepreneurs are often not familiar with the financial world butand assume their advisers have perfectly honed forecasting skills. “They assume we know what is going to happen in the markets when we don’t,” says one adviser. “If we don’t make that clear we could end up overpromising on what their investment can deliver.”
A key aim of any investment is to diversify investments to reduce risk. “Any strategy should diversify risk by both asset type and geography,” says David Rowe, managing director at UBS Wealth Management. “They are looking to preserve wealth – not make it. They should not go into markets just because they have done well or pull out of one that has done badly. Attitudes to risk should not just reflect how well markets have done.”
Investing in other businessesventures can be a good idea because it maintain the individual’s a connection with the business world, b and keeps them active and involvedut there are y need to recognise the risks involved and there should be put a limit on the extent of this activity. “I would say: set 10-15 per cent aside for riskier investments but no more,” says Grant Thornton’s Warburton.
Temptations to avoid in investing include investing in an entrepreneur who reminds you of yourself when you were young, investing in a local business simply because it is local (although it will be easier to keep an eye on) and investing in a particular sector because you know it well. This can lead to a very concentrated portfolio.
Entrepreneurs who have retained a stake in their own business – or taken shares in the acquiring company – need to be particularly careful about this concentration of investments. “If you have acquired stock that is trading on 29 times earnings you need to protect your position against market falls,” says Schroders Robinson. “You could hedge by means of options or derivatives.”
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