Somewhat surprisingly following covid, the lockdowns and recent downturn in sentiment, there has been a significant increase in corporate activity resulting in family or founder led businesses being acquired by larger listed local and overseas organisations. Many of these deals have materialised this year but are really the result of negotiations over the past 1-2 years, before any downturn.
Imagine you are a founder selling a business for $10m or $100m. Once you sell there are two very different challenges you are faced with next. The first is the business transition and the next phase of your life. The second phase is dealing with what is often newly acquired generational wealth and setting up structures and investments for your family for years and decades to come. This can be daunting and stressful.
When you’ve been running a business for the past 10, 20 years or more, once you’ve sold it is a significant transition to manage. The way the sale is structured will provide a transition framework by default, often with a 1-3 year earn out. This is effectively a bonus component which is in place to incentivise the founder to stay on, stay engaged and make the transition work for all stakeholders. But importantly this also facilitates the founder’s psychological transition into the next phase of their life too.
Despite all the due diligence you might do, it is rare to find that perfect partner to buy your business. It is ultimately a sale, and you will need to become comfortable that you are exiting the business over the next couple of years. I have found that despite the best of intentions from all sides that once you move from being the founder, making all the decisions, to the manager of that business there is a culture clash with the new ownership. It makes it difficult for any founder to stay involved beyond their ‘earn out’ transition period.
So, think about how long you want that earn out transition to last. One year will pass quickly but three years can become a grind for entrepreneurial founders who quickly feel trapped by the lack of autonomy and increased bureaucracy that inevitably follows. But life keeps moving forward. The earn out will take care of itself as will the shares component the owner is paid by the acquiring company. Typically, the largest component of the sale is in cash. Once the sale is completed and you’ve got the cash in your bank account – what then?
When you run a successful business with good cash flow there’s enough money to do all the things you want. Lifestyle is funded by an ever-growing business, so money isn’t much of a concern. But that mentality changes once the business is sold and it is confronting. Suddenly you have a quantifiable amount of money – this is what you have for the rest of your life, for you and your family. Big or small, that is the figure you have to work with now. It can be daunting.
For most people, it is much more stressful than you would think. It seems surprising but it’s a very common and reasonable reaction. In most cases that cash represents most of your life’s work and most of your net wealth. The next thing that hits you is that you realise that while you are excellent at running your business, you don’t really know much about managing investments or generational wealth.
So, what do you do next? Here’s my advice. Do nothing. Settle. Leave the money in the bank for 3-6 months. Do not rush. Take a breath and compose yourself. Take a holiday. Some people are better at this than others. Take that time to decompress.
Only after that phase of processing a lifetime’s work and the pending change should you start thinking about the next steps. Good decisions are not made quickly. So, it’s important to have a clear mind and remove the emotion from the equation before you think about the future. Only then are you really ready to plan your next steps with regards to the big picture, structures, and investments.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.