4 steps to navigate the impact of sudden wealth: Tips for business owners and entrepreneurs
By Sharon Olson, CFP, CEPA
May 2, 2023
While sometimes referred to as sudden wealth, it often has been years in the making.
Many business owners and entrepreneurs spend decades building their businesses, pouring their profits back into the business while living a rather modest lifestyle themselves. They don’t consider themselves wealthy by any means. Then, the day approaches when it’s time to sell the business and transition it to new owners. Suddenly, their lives are about to change. The fruits of their years of labor are poised to be realized by a liquidity event. In other words, these hard-working business owners are about to experience the phenomenon of sudden wealth.
Sounds great, right? A well-deserving family now has the resources to live how they’ve always dreamed of. But not so fast — with wealth comes complexity. If not managed well or clearly thought through, that wealth can quickly dissipate, or worse, create havoc within the family.
Sadly, I’ve seen it happen many times. The problem is many of these first-generation wealth creators don’t know what they don’t know. Often, they don’t even know what questions to ask. Thankfully, with careful planning and the right team, sudden wealth can be a blessing rather than a curse.Here are four key steps to get started.
1. Assemble your team
Don’t try to do it alone. Significant wealth in the multiple millions of dollars requires a highly coordinated team of skilled professionals to manage effectively. Consider including accountants, attorneys, investment bankers, financial advisers (specifically those who offer the capabilities of a multi-family office), business succession planning specialists and maybe even a life coach.
Again, wealth brings complexity, so don’t underestimate your needs or make rushed decisions. The last thing you want to do is wing it and make poor decisions early on that become irreversible.
When selecting a team of advisers, take time to ensure they are on your side. Do your due diligence to make sure they — and their firms — don’t have conflicts of interest or aggressively push products that aren’t in your best interests. Your success and happiness should be their only objective. If you sense any ulterior motives, that’s a red flag.
Your team of advisers should also be willing to take the time to deeply understand what is important for you and your family, along with any of your short- and long-term goals. If they don’t make that attempt, that’s another red flag. Finally, any adviser you work with should be able to demonstrate their experience guiding families like yours who have gone through similar liquidity events.
2. Define your personal and family goals
Any qualified adviser will quickly explore what you want to achieve as a first-generation wealth creator. Reflect deeply on what you want your life — and that of your family — to look like going forward. How do you want to use your wealth? What pitfalls do you want to avoid? Beyond your immediate lifestyle needs, how else would you like your wealth to impact future generations and the causes you care about? Make sure to be specific when you answer these questions.
When envisioning your desired lifestyle and greater philanthropic goals, carefully define your income needs. Budget realistically for what it will cost to fund the lifestyle you desire and the causes you want to support. What is your time horizon? If you are relatively young and healthy, that could be decades. But even with several million dollars in the bank, those funds can be depleted well within your lifetime without careful planning.
Once you have clarity around your aspirations, bring your family into the conversation at the right time. Invite their input as to the purpose of the family’s wealth. After all, the responsibility of managing the wealth will likely one day fall to them. So, get them excited and give them a voice to ensure a lasting legacy.
3. Evaluate your risks
Wealth not only brings complexity, it also brings risk in the form of increased taxes, lawsuits and litigation, divorce and cyber security threats; the list goes on.
Because of this, it’s important to conduct an inventory of all the risks you could face. Doing so might justify raising your personal liability insurance limits. It could mean implementing a robust cybersecurity software solution for your family. Perhaps it will result in changes to the physical security of your home. It’s best to think through worst-case scenarios and take steps to mitigate the likelihood they will come to be. Don’t leave anything to chance.
4. Align around the greater impact of wealth and what’s next
One of the biggest surprises for successful business owners or entrepreneurs who go through a liquidity event is just how emotional the experience is. To let go of your business is a lot to process; it requires a redefining of self and purpose going forward. It can easily take a year or two to really feel good about who you are now and how you want to spend your energies going forward.
For some, there is even a feeling of guilt around what can be viewed as excess wealth, the money above and beyond what you need to live your desired lifestyle. It’s OK, and not uncommon, to feel that way. Channel those feelings into what you can accomplish with that wealth.
Work with a multi-family office or a similarly qualified adviser and find purpose in philanthropy, giving back or launching new entrepreneurial pursuits. Doing so can be incredibly helpful in realizing the lasting reward of sudden wealth.
Sharon Olson is the founder and president of Olson Wealth Group, a multi-family office and independent wealth management firm focused on legacy planning. You may reach her at sharonolson@olsonwealthgroup.com or 952-835-1797
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Disclosures: Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
