Investing after Selling Your Business: 3 Principles for Success

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 a void where the control of your business once resided.

At Corient Private Wealth, we have worked with countless business owners, and 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, often never finding a proper equilibrium.

To find balance, consider segmenting your portfolio strategies. Your portfolio can address each of your near-term, intermediate and even generational goals. A properly balanced portfolio that’s based on your time horizon and risk tolerance will typically look something like this:

• One to two years of withdrawal needs held in cash
• Two to five years of withdrawal needs held 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 arises.

In high-stress times, people 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 that’s brought about by inflation. While interest-paying investments like bonds can be helpful for an intermediate period, they may not help protect your purchasing power over longer 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, by investing with an overly narrow scope?

You can never be sure that one particular investment will outperform all others. But you can be sure that a collapse could shatter your financial future if you over-allocate to one specific sector or company—despite the comfort that often comes with sticking to the familiar.

Yes, with a well-diversified portfolio you likely won’t benefit fully from a meteoric rise of the new darling technology 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.

Scalability

Time is scarce. You understand this intuitively when you own a business. Just about 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.

Let’s consider the example of a former business owner who sold his business a few years ago. He redeployed about $3 million of the proceeds into another venture. He was pretty proud of his investment, as it produced about $300,000 of cash flow each year—a decent 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 per 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 simply a return on his labor, and not a return on his investment. His investment return was only 2% when viewed through this lens. He could have invested in no-risk Treasury bonds and done just as well or even better.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 maximum 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 of this effort would be 20% on your $1 million investment, or $200,000. As in the previous scenario, this $200,000 has essentially become a return on your labor, not on your investment.

In our assessment, to be profitable, an investment must be scalable. As an investment requires more and 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 going to be? We’re here to help, so feel free to contact your Corient Wealth Advisor.

¹ https://www.ustreasuryyieldcurve.com/

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