Your wealthy client wants to sell his or her business. What can you do to help plan properly for this major liquidity event?
Construct a "dry run" scenario analysis so the client can envision what their life will be like after the sale, and what their corresponding financial needs will be, suggests Michael Montgomery, managing director of CTC Consulting/Harris myCFO.
"When the company goes away, life is very different," Montgomery says. "Many expenses that the company paid become expenses the client must pay."
BEFORE AND AFTER
The scenario analysis should include the client's financial profile before and after the sale. For example, before the sale, a wealthy business owner may have a personal residence; concentrated equity ownership in the company; real estate leased to the company and cash flow derived from wages, company distributions and distribution of rents received from real estate.
After the sale, the business owner is likely to purchase an additional residence or vacation home; have a material liquid portfolio; real estate that is retained and leased to the acquirer of the business and cash flow derived from portfolio income, a consulting contract with the acquirer, earn-out payments and distribution of rents from retained real estate.
"The question for the client is, will they have enough to meet their lifestyle maintenance goals?" Montgomery says. "If yes, what else can they do? If no, what do they have to do?"
‘MENTAL ACCOUNTING BUCKETS’
Harris myCFO advises clients to use four "mental accounting buckets" when considering goals for their post-sale capital deployment. The most important is usually general lifestyle goals of food, clothing, travel and entertainment, followed by purchases of such discretionary items as new homes, autos, planes or boats. Gifts to children, parents and other family members are also highly valued goals, as are philanthropic gifts and donations.
Advisors should then help clients perform a dry run analysis of the after-tax proceeds they will receive from the sale of their business under a best case, worst case and base case scenario. Using those results, they can then determine how much "core" capital they need to meet their lifestyle goals - the amount which, when allocated and invested wisely, allows them to spend what they need each year, indexed for inflation for the rest of their life so they will never run out of money.
Subtracting the clients’ core capital from their total capital, Montgomery says, will determine how much money will remain for the clients' other goals and considerations.
"The most common mistakes business owners make when selling is 'ready, fire, aim,’'' according to Montgomery. "Advisors must help them take them take a breath and think things through."