Adjusting to life after the sale of a business requires a mindset shift. First,
there is no longer a paycheck if the business was sold in its entirety — and if
owners are still collecting a salary, it is likely modest in comparison to previous earnings. Secondly, time dedicated to company
matters — which was most of the time —
is now free and open for fresh pursuits.
Expenses that were once run through the
business now fall on personal tabs. Now
that the business is sold, owners need a
cash flow plan for life.
“There are transitions that are natural after
the sale of a business,” says Joel J. Guth, an
advisor with Citi Family Office. “Owners may
move to a new area, buy a second home, travel extensively or purchase some kind of toy
— a boat, a plane, cars.”
What’s more, they will want to continue
gifting, perhaps establish a public legacy, and
fund trusts for children or grandchildren. All
this must be figured into a detailed budget so
they can invest assets wisely to ensure adequate cash flow to fund the desired lifestyle.
In the first of four installments on planning
after a business sale, Guth addresses cash
flow planning strategies.
How do cash flow needs change once a business is sold?
Owners’ lives change dramatically after a
sale. While running the business, they did not
have as much free time to spend money. That
explains why we may see clients’ spending
increase 50 to 100 percent a year. They buy
vacation homes and spend money decorating them. They buy toys they didn’t have time
to use before. They can no longer run
expenses through the business, so the
$250,000 they spent each year maintaining
their lifestyles jumps to $400,000 even without adding luxuries. All this adds up.
What common mistakes can owners make
when managing their personal cash flow?
Many owners neglect to account for large
expenditures, or they make spontaneous
purchases, so they must sell assets to pay for
them. On the other hand, it’s no better when
owners are frugal but maintain so much liquid money that they don’t increase the value
of their investments. Owners must strike a balance, and doing so requires an accurate
estimate of cash flow needs.
Another common mistake is not anticipating the timing of cash flow needs. For example, owners who know they will make a significant gift each October should plan to have
the cash on hand at that time. Otherwise,
they will scurry to liquefy assets in time.
Finally, as previously discussed, owners
must now cover personal expenses that they
once ran through the business.
What are the first steps to creating a cash
flow plan?
Owners must paint a picture of what their
lives will be like after the sale. Will they
spend half of their time in Ohio and the
other part of the year in Florida? If so, will
they fly privately between homes? What will
property taxes cost in Florida? Will they hire
professionals to manage landscape or
housekeeping matters? How much will they
donate to various charities, and will they
fund trusts for other family members? What
lifestyle expenses must they afford each
year? What are their new hobbies, and how
much will they spend on them?
This process is similar to creating an
annual budget for a business, except the
line items apply to the owners’ lives. The
goal is to come up with a number, so owners can build an annual budget.
What asset management strategies should
owners consider?
Some owners are worth nine figures and,
because of their lifestyles, they keep their
assets very liquid and short-term. Others are
worth $25 million, and they keep little liquid
because they don’t spend as much and prefer
to grow principals. Owners must base asset
management strategies on that magic number they figure after creating a cash flow plan.
Next, owners must consider their level of
risk. Typically, clients will divide investments
into two groups: one liquid or cash equivalent
group to finance immediate cash-flow needs
and an ‘at-risk’ group to take advantage of
potential opportunities that the market and
global economy present. The riskier group is
invested over a greater time horizon to fund
long-term goals like funding large charitable
contributions or assisting children.
The ultimate goal is to help ensure that liquid assets are always available to fund the
lifestyles and long-term goals of owners as
they pursue the next chapters in their lives.
Citi Family Office is a business of
Citigroup Inc., and it provides clients with
access to a broad array of bank and nonbank
products and services through various subsidiaries of Citigroup, Inc.
Citi Family Office is not registered as a
broker-dealer nor as an investment advisor.
Brokerage services and/or investment
advice are available to Citi Family Office
clients through Citigroup Global Markets
Inc., member SIPC, and Citicorp Investment
Services, member NASD/SIPC. All references
to Citi Family Office Financial
Professionals refer to employees of Citibank,
NA, Citigroup Global Markets Inc. and/or
Citicorp Investment Services. Some employees are registered representatives of either
Smith Barney, a division of Citigroup
Global Markets Inc., or Citicorp Investment
Services that have qualified to service Citi
Family Office clients.
Citigroup Global Markets Inc., Citicorp
Investment Services, and Citibank, NA are
affiliated companies under the common
control of Citigroup Inc.
JOEL J. GUTH is an advisor in the Citi Family Office at Smith
Barney, a division of Citigroup Global Markets. Reach him at
[email protected] and (866) 464-2750.