Entrepreneurs are often better at making money than managing it, so assembling a team of experienced wealth advisers is critical. Advisers can help evaluate wealth needs for future generations and develop a clear plan that will support the entrepreneur’s future lifestyle and legacy.
Entrepreneurs’ financial goals are intertwined with their personal ones, and they need to consider both investments when looking at what is next.
From entrepreneur to investor
An approach used with clients is to divide the investment portfolio into two accounts. The first account supports a lifestyle and is more conservative in nature, with the goals of wealth preservation, principal protection, stability, liquidity and income generation.
To reduce the impact of volatility, it is best to ease into the market using a dollar-cost averaging strategy and investing a smaller fixed amount on a regular schedule over a certain period.
The second account is for long-term goals, including the family legacy and eventual transfer of wealth. This account acts as a fund for new ventures, private equity and private foundations and generally provides growth of principal for future generations. It is also a great opportunity to get input from the next generations on how they would like to invest the funds.
At times, there may be a need for a third account to allow investors to chase the buzz of a hot investment idea. The thrill-seeking is fine, but if the primary goal of the investor is to preserve wealth, a large speculative investment is not consistent with the overall plan.
Many entrepreneurs-turned-investors will dedicate part of their wealth — perhaps 5 to 10 percent — to a risk capital portfolio. The risk capital is to be deployed entirely at the discretion of the investor, while the adviser ensures that the balance of the portfolio is managed in line with the wealth preservation strategy. This approach allows the thrill- or risk-seeking activity while limiting the potential downside.
Your business is sold — what’s next?
Entrepreneurs commonly sell their business with thoughts of retiring to a life of leisure and later end up starting another business. This is endemic of the type of personality often seen in entrepreneurs — they are uncomfortable being idle.
Although this might seem like a trivial issue, it is important to think about the long-term wellbeing of the entrepreneur and his or her family. Prior to a liquidity event, entrepreneurs should consider how they will fill the days after their business is gone. The answer to this question is based on the personality of the entrepreneur, but it comes down to allocation of time, resources and priorities.
The new free time can be spent in a variety of ways — traveling, pursuing philanthropy, spending time with family, starting a new business, advising nascent businesses, managing a portfolio of private equity investments, etc. Life after business is much more casual, and entrepreneurs can create their own mix of activities that match their values and skills.
The decision to step back from running a business is never an easy one and can signal a shift to the next stage of life. This transition can be seamless if the entrepreneur assembles the right team of advisers. With proper advice and planning, entrepreneurs can embark on new adventures while using their life’s work to provide for their family.
Ronald Ambrogio is regional president – Ohio at BNY Mellon Wealth Management