The Post-Liquidity Mental Shift

Adjusting to a liquidity event can be challenging for even the most successful entrepreneur. Many believe that once a business is sold, the entrepreneur who has been at the helm of said business (and managing all the stress and decision-making that comes with running a business for decades) is living on “Easy Street,” able to enjoy all the freedoms that come with a major liquidity event. However, few entrepreneurs are truly prepared for the mental shift that comes with selling a business.

Once the business is sold, assets and available capital will often fall under the advisement of a trusted investment adviser. But many entrepreneurs struggle with no longer being the one solely in charge. How does one manage the shift in lifestyle and life phases? Richter partners, Greg Moore and Bill McLean give their insights on how clients can navigate their new reality.

man staning by a window overlooking the city

1. Many entrepreneurs seem to struggle right after a liquidity event – why is that?

GREG MOORE (GM): When a family is going through the sale of a business, they are going through a significant inflection point which requires a lot of attention to everything from financials to tax, to estate planning. Few prepare themselves for that next stage once everything is finalized. The end goal has been to sell, so that has always been the sole focus. They don’t necessarily consider how the next phase will impact them once that goal is achieved.

As an entrepreneur, it can be a particularly challenging time because they’ve gone from a period of having great agency over the building of the business – sometimes for decades. Years were spent in control, being the one giving the insights, providing influence, and largely, shaping their own life because of how they managed the business and decision making. Now this is all transitioning into an investment portfolio; they don’t have as much insight, and that control changes dramatically, which becomes difficult to navigate.


2. So they don’t really anticipate the weight of the mental shift?

GM: If you have self-identified through your business of 10-30 years, it’s not unreasonable to expect that if you sell, your sense of self-worth will be uniquely challenged because what you’ve tied yourself to for so long is now gone. For many it’s a big shift in personal identity – the business was their “baby”, they’ve identified through it their whole life and may not be anticipating the ‘who am I?’ / ‘what do I do now?’ questions that inevitably arise after, or how it feels to give up control.

They are also often reluctant to bring in advisors who might challenge their thinking because they don’t feel they need to have their thinking challenged. But as trusted advisors, we help them prepare for what can be obvious challenges as well as those that are unforeseen. Being an effective advisor means being there through that emotional journey.


3. You speak a lot about the ‘survivorship bias’ they are coming down from right after a sale, can you elaborate on this?

GM: We’ve got this survivorship bias in the business world; every successful entrepreneur has become successful through a ‘journey of mistakes’ but at the end of the day they are standing tall having found success which leads to said bias. They believe then that they should continue to apply the same approach to how they manage their wealth. The success is amazing, but it’s likely unique to the line of business or realm of experience the entrepreneur has; it’s our job to come in and help the entrepreneur de-risk that mindset. To move forward, you must have a different perception on risk as it relates to your financial ecosystem.

This is a challenge for entrepreneurs – they want to apply that overconfidence to their investment landscape and re-invest everything right back into a similar business as their original one. This is especially true for tech entrepreneurs, given they feel that they’ve got unique access and insight into that field. They want to jump right back into that system. Our job is to help manage through risk as a fiduciary, and evaluate among other things: do they have significant concentration risk? They might not see the benefit, but we want to ensure that what they’ve worked so hard to achieve is protected, diversified, and working optimally for them and their family going forward. As the saying goes, getting rich and staying rich are two distinctly different things.


4. Do you ever see pushback after explaining all this?

GM: Yes, financial market performance over the last 15 years has lulled many investors into a false sense of security. Global central banks and governments have created a wash of liquidity in the markets which has led to extraordinarily risk-seeking behaviour by investors, driving up asset prices along the way. The relatively easy backdrop of the last decade or so can make investors complacent and encourage recency bias – but what’s working now may not necessarily be true for the future. It’s important to understand the utility of de-risking financial wealth in order to live preserve your lifestyle for the rest of your life. We aim to right-size those allocations and build pools of capital that will have different utility for the family.


5. Does this mindset also apply to how they approach transitioning their wealth to the next generation?

BILL MCLEAN (BM): Whether it’s transitioning the business or the wealth, there is still that comfortable feeling of maintaining control that the current or ‘controlling’ generation might want to retain. To some degree, we all have this sense of ‘order’ in family roles – you’re always ‘the son or the daughter or the parent’. Parents often still perceive their adult children as children and often have difficulty distinguishing their kids as capable and able, so often parents are reluctant to bring their children into the conversation, even as adults.

The mental shift, and de-risking the mindset, applies to generational transitions, as well. In this sense, it’s about determining how we’re going to build continuity and understanding within the family; making sure the next generation of children or grandchildren are prepared and capable but are not dis-incentivized with the wealth. The healthiest way to do this is to bring the next generation into the conversation sooner than later. Simply stating ‘they’re not prepared’ won’t prepare anyone for the transition that will eventually occur. Delaying important conversations only builds anxiety and resentment. The children think the parents don’t have faith or trust in them. Further, without understanding the wealth and the intent behind it, there’s no conceptual understanding of the legacy and the complex financial world that will inevitably be the children’s responsibility to manage.


6. How do you suggest engaging the next generation constructively?

BM: The overall goal is to build continuity for a positive transition between one generation to the next. In the absence of proper planning, education, and developing strong communication channels, there is a much higher probability of poor communication, in-fighting and feelings of resentment that can easily accumulate.

To engage the family constructively, we ensure that a structure exists such that the family has been informed and has agency in decisions that will affect the transfer of wealth for future generations. It’s not formulaic, and no one is pushing a value system on anyone else, but rather it’s about ‘explain to me why you are thinking this’ and then having the opportunity to discuss it in a positive environment. Another exercise (although uncomfortable for many) can be a death or incapacity drill – sitting with wealth creators and going over everything they’ve planned to date to outline how things could unfold in the event of their passing. This allows an understanding of the intention behind the actions of the wealth creator, while reducing the possibility of major surprises within the family.

Creating more organized structures around the family enterprise is key (typically referred to as ‘governance’). Part of the value we bring to the table is providing support, coordination, and active facilitation. This quarterback role works with both the family and a potentially diverse set of other third-party advisors to create the greatest possible alignment for the family.


7. Is there ever hesitation on the part of the entrepreneur/wealth creator?

BM: It’s completely understandable that some may want to avoid transparent discussions such as these because of the discomfort of giving up one’s control, discussing things that have been more easily avoided for many years, and the unknown of receiving feedback from other family members that might differ from your own viewpoint. These, and many other reasons might dictate the avoidance of such important discussions. But for the good of the family and the future generations, we will often ask the wealth creator to put himself or herself in the shoes of their heirs. To think about the decisions they will have to face and the input and guidance that could be provided to them now – before they are facing these difficult and emotional transitions. It’s a way for the wealth creator to take a step back and really think about their own legacy. Often, they have worked so hard throughout their lives that they don’t permit themselves the time to outline what they want their legacy to be (as an extension of their values) – this exercise encourages them to pause and effectively plan it all out.

As a result of all of this, the family has a much better ability to arrive at a shared understanding on decisions together. This process helps the family develop a much greater capacity to navigate the inevitable transitions ahead of them and reduces the risk of unnecessary tensions during a time of emotional strain when facing loss and change within the family.


8. Is this in addition to having an up-to-date will and estate plan?

BM: Absolutely. Wills set forth the clear delineation of decisions. Wills also tend not to express the more nuanced feelings that the wealth creator wants to share and the reasoning behind those decisions. These sentiments should be discussed as a family and can help inform how the estate plan will be executed, and how the next generation can be involved. As the family enterprise becomes more complex, with shareholder agreements, trusts, estates, etc., the wealth creator will want to think about the overall governance approach and how to include the affected family members in this process.


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