January 31, 2020

Congratulations! The enterprise you have worked tirelessly to create has now been sold or gone public. While you were consumed with building your business and formulating the best exit strategy, you probably had insufficient time to reflect upon the impact of this important milestone.  Now that the event has occurred, you need to thoughtfully navigate this transition period. Grant yourself considerable time to reimagine your financial circumstances and your future.

Now is the perfect time to connect with your Wealth Manager. Before making any life changes, make sure you understand the tax implications of the transaction as you may not have as much wealth as you initially anticipated. Tax treatment varies depending on the source of your shares (for example, restricted stock vs. qualified small business stock) or the receipt of cash. 

Do not be tempted to rush decisions on significant expenditures. Develop a strategy and decide on a list of your priorities. Start by addressing your most pressing needs, and then think about realizing some of your dreams. Your balance sheet has changed dramatically so take the opportunity to update and consolidate your accounts, where appropriate. Perhaps a new home is attainable but know your facts before proceeding.

Homeownership or upgrades are often early dreams, but they may not secure your financial future. It is important to consider all aspects and impacts of such a purchase. Often lenders will not include the full value of a concentrated single stock position when determining a mortgage amount among other factors that may affect your ability to borrow. Perhaps you do not have any recent salary history and are unemployed after selling your company. It is important to consult a mortgage broker early in the process before falling in love with a property. New annual property taxes, insurance, maintenance and utility costs can quickly escalate when upgrading your home. New homes also often mean new home furnishings which should be included in your budget. And if you are contemplating another start-up, can you afford the home if it doesn’t work out? You will need adequate liquid assets for the day-to-day necessities of life, so it is important to understand the percentage this single asset comprises of your overall net worth. If you received shares of stock in the sale, you are taking an even greater risk if you are relying on these shares to support your new elevated expenses. If the stock price falls, what will that mean for your new lifestyle?

It is a shocking statistic, but as many as 70% of Americans who receive a sudden windfall will lose it all within a few years, because they feel richer than they are and develop habits of overspending that are hard to break.¹ Do not succumb to the temptation of overspending! Carve out and build an investment portfolio to provide you with adequate savings to comfortably cover all of your expenses and retirement savings if your next venture is not a success. You’ve already had one big win and are hopefully on track to have another, but 75% of venture capital backed startups fail and only 30% of founders of previously successful businesses succeed in their next venture.²

Finally, do not forget to pay off outstanding loans! It is not uncommon for founders to accumulate high-interest debt through personal credit because banks are hesitant to extend loans to companies with limited collateral and cash flow. Often interest costs associated with this type of debt far exceed the returns that can reasonably be expected from a diversified portfolio of stocks and bonds. 

Avoid becoming one of the 41% of households expected to run short of money later in life.³  Take this opportunity to set aside sufficient funds to ensure that you are well positioned not only to maintain your current lifestyle, but also for your retirement years. Work with your Wealth Manager to determine if you are on track, and remember to review your estate plan and insurance coverage so that they align with your new financial picture.

<sub>1. www.wsj.com/articles/senate-spending-bill-includes-significant-changes-to-u-s-retirement-system
2. www.smallbiztrends.com/2019/03/start-up-statistics-small-business
3. www.forbes.com/sites/financialfiness/2013/01/11/how-not-to-blow-a-financial-windfall</sub>