In this video one of co-founders, Peyton Carr, describes the realities that founders often face after exiting their companies. The video above is based on an article that Peyton wrote for Barron’s on December 11, 2023.
The culmination of a business exit is often seen as the pinnacle of a founder’s or business owner’s journey, celebrated as a remarkable achievement in the entrepreneurial realm. However, attaining this summit unveils a new landscape, one that is characterized by both financial prosperity and emotional intricacies. This article aims to guide startup founders through the complex realities they often face after exiting their companies. It delves into the ongoing challenges and changes that persist long after the contracts are signed and the champagne corks have landed on the ground.
The Residual Emotional Impact
It is important to note that the period following an exit is not always a continuous celebration of financial success, contrary to popular belief. For many founders, it can be a whirlwind of emotions, including joy, a sense of accomplishment, and sometimes unexpected nostalgia or a sense of loss. Sometimes the period following an exit can lead to a crisis of identity and a loss of purpose for entrepreneurs who have dedicated their lives to their startups and are no longer involved with the day-to-day operations. Exploring who they are beyond their business becomes a crucial part of the journey that lies ahead.
Navigating Self-Reinvention Post-Exit
Understanding the emotional journey intertwined with the process of business exit planning is crucial. An exit is more than just a financial shift; it represents a pivotal transition in an entrepreneur’s life path. Similar to transitioning into retirement, the shift from an intense start-up rhythm to a more relaxed pace can be quite jarring. It is equally important to proactively prioritize your emotional well-being along with making sound financial choices post-exit. It is common to experience feelings of unease and second-guessing past decisions during this period.
For many founders, their personal identity is deeply intertwined with their business ventures. Years of dedication mean that the role of “CEO/Founder/Business Owner” is more than just a title—it becomes a fundamental part of their identity, influencing their social standing and providing a sense of accomplishment within their professional networks. They created business value, enterprise value and grew their business valuation up through the exit strategy. Transitioning from a fast-paced leadership position to an unexpectedly quiet reality can be a significant contrast for many individuals.
Key takeaway: Many founders experience a loss of identity and feeling adrift after a sale. Rest assured, you are not alone in this journey. Take the time to relax and reflect on what truly ignites your passion for the future. What inspires you? What kind of daily life do you envision? It’s crucial to define your personal goals, understanding that it may take time. Additionally, focus on rebuilding personal relationships and networks. Exercise caution when making significant financial decisions or committing too soon. When considering investments, especially right after an exit, evaluate opportunities objectively, without letting emotions guide you. For many founders, taking a couple of years off to explore new paths proves invaluable.
Charting the Entrepreneur’s Post-Exit Journey
After successfully selling their business, many founders are faced with a critical juncture as they navigate the new financial landscape. While the temptation to indulge in extravagant spending may be strong, it is paramount to recognize that this sudden influx of wealth serves as a pathway to long-term financial security.
Key Takeaway: Many entrepreneurs who have recently liquidated their ventures or their privately owned business often explore angel investing or startup mentorship as a next step. However, it is important to dispel the misconception that the skills that led to their own success will guarantee success in investing. Furthermore, for those who miss the excitement of building something from the ground up, simply investing capital in startups may not satisfy the desire to create and grow a new enterprise to the point where there are potential buyers interested. For aspiring investors, it is wise to develop a clear strategy that includes setting annual and per-venture investment limits. Begin by making modest commitments to gain experience and insight. If the enthusiasm persists after the initial learning phase, reassess and determine if this path can provide long-term fulfillment. Integrate these investment thresholds into your broader financial goals, ensuring that this aspect of your wealth aligns with your overall investment framework and objectives.
Advanced Financial Planning and Decision Modeling
After selling a business, new opportunities arise. You have the chance to diversify your investment portfolio, which can encompass various options such as the stock market, private equity, real estate ventures, hedge funds, and more. You could also consider establishing a family office as well. It’s crucial to develop a thoughtful post-exit planning process that aligns with your personal life objectives, risk tolerance, desired timelines, and interests. Taking a deliberate approach to financial planning is essential at this stage.
Key takeaway: Investing in rental real estate is appealing to many entrepreneurs, but the day-to-day responsibilities of property management often lead to the use of management firms. However, it’s crucial to approach post-exit financial decisions with caution. I strongly emphasize the need for thorough analysis and careful consideration before making significant financial moves. One alternative to active involvement is investing through a reputable real estate private equity fund, which may offer comparable or even superior returns. Conversely, it’s important to assess whether direct ownership aligns with your genuine interests. Evaluating each option requires meticulous quantitative analysis and a deep exploration of qualitative aspects.
Tax Minimization Strategies and Post Exit Plan
Navigating the complexities of taxation after selling your business is crucial. A proactive and strategic approach to tax management can have a significant impact on your exit deal, tax consequences, and the planning that led up to the sale or mergers and acquisitions transaction. Ideally, your exit plan should include leveraging various tax strategies, such as those outlined in the earlier article “Advanced Tax Strategies for Company Founders.” However, even if you haven’t planned, there are still opportunities for optimization.
Key point: Tax planning requires continuous evaluation as it is influenced by various factors. These include changes in financial status, family circumstances or a family member, tax laws, health, philanthropic activities, recreational interests, succession planning decisions, and available opportunities. It is crucial to initiate this process early on, when your business is at an early stage and has a relatively modest value. It should also extend beyond your exit and into future ventures. Our advice to founders and business owners is to treat tax and personal financial planning as you would a product development roadmap – constantly updating it to adapt to the evolving landscape.
Reducing Exposure to Financial Threats
Being wealthy naturally exposes you to legal claims. To safeguard your financial assets, it is crucial to consider asset protection strategies such as trusts and utilizing legal entities. These can provide defense against losses but also offer potential tax benefits. Foundational property and casualty coverage, combined with an umbrella policy, can significantly extend your liability protection.
Key takeaway: After you have an exit and have money, you become a target for litigation, regardless of the validity of the claims. Publicizing your wealth can unfortunately attract potential litigants. Various scenarios, such as personal injuries on your property or car accidents involving family members, can pose risks. Numerous cases exist where individuals have faced legal actions and received judgments worth millions for similar circumstances.
Ongoing Monitoring and Fine-Tuning
Navigating the waters of wealth management after a business exit requires adaptability and alignment with your long-term financial vision. One common mistake made by entrepreneurs is neglecting personal planning and financial strategy development, lacking a holistic approach. It is crucial to understand that the wealth generated through your business exit forms the foundation of your future lifestyle. Regular strategy sessions with financial experts can help you realign your investment portfolio to reflect ongoing market dynamics, seize new opportunities, adapt to individual life changes, pursue financial aspirations, and indulge personal interests.
After exiting their businesses, many business owners tend to adopt a more conservative approach towards financial risk, prioritizing strategies that grow wealth without takign excessive risk. This adjustment in their portfolio risk plays a critical role in shaping their future lives. It’s important to avoid taking excessive risks that could limit your options during economic downturns. The founders and business owner clients we counsel highly value the freedom, flexibility, and optionality of choices that come with a well-coordinated financial strategy, a sentiment that is reflected in their drafted Statements of Financial Purpose.
Key takeaway: Every investment decision should be carefully evaluated to ensure alignment with a founder’s comprehensive strategy, financial plan, and aspirations. At a certain point, some individuals prioritize consistent freedom over high-risk endeavors, empowering them to pursue their personal interests. For entrepreneurs still inclined toward high-risk opportunities, it is advisable to allocate a designated portion of their for such ventures. Although losses in this segment are unfortunate, they should not hinder progress toward overall financial targets.
Repeat Founders and Business Owners
Many entrepreneurs who’ve previously sold a company often feel a pull toward launching new ventures, propelled by various inspirations. Discussions with our clients indicate that some wish to apply their gained wisdom, good business strategy, and connections to craft an upgraded iteration of their original company. Others are simply drawn to the thrill of innovation and the excitement of pioneering brand-new ideas. The decision for these seasoned founders to pursue another business ownership hinges on elements like the ingenuity of the idea, chemistry with potential co-founders, and the opportune moment. Regardless of their unique motivations, the sense of accomplishment derived from founding and running a new business venture significantly enhances overall quality of life.
Takeaway: When considering investing personal capital into their next startup, entrepreneurs often ponder this question. While strategies may vary, some find it beneficial to engage with venture capitalists early on, as their new idea takes shape. Investing in one’s own resources can demonstrate commitment to employees and create a positive impression. However, it is crucial to strike a careful balance, considering one’s financial means. Avoid investing to an extent that compromises personal financial security or induces stress. It is advisable to consult with a financial advisor and financial planner to navigate this decision.
Transitioning from full-time entrepreneurship to life after exit is a complex journey that goes beyond financial considerations. This period requires a thorough reassessment of financial strategies, investment landscape, and personal well-being. Think of it as an enlightening “Act II,” filled with opportunities similar to the initial phase of your entrepreneurial story. It deserves careful planning and introspection. Embrace this important transition and the possibilities it brings. Seek advice from an experienced exit strategy and exit planning team and leverage your networks to navigate this new chapter successfully.
The information and opinions provided in this material are for general informational purposes only and should not be considered as tax, financial, investment, or legal advice. The information is not intended to replace professional advice from qualified professionals in your jurisdiction.
Tax laws and regulations are complex and subject to change, and their application can vary widely based on the specific facts and circumstances involved. Any tax information or advice in this article is not intended to be, and should not be, used as a substitute for specific tax advice from a qualified tax professional.
Investment advice in this article is based on the general principles of finance and investing and may not be suitable for all individuals or circumstances. Investments can go up or down in value, and there is always the potential of losing money when you invest. Before making any investment decisions, you should consult with a qualified financial professional who is familiar with your individual financial situation, objectives, and risk tolerance.