Financial advisor Canada

After selling your business, you may receive a lump sum in cash. Deciding how to allocate and invest the proceeds after selling your business is a big decision that requires careful planning. If you expect a sudden windfall, develop a plan to invest the money, so you’re not sitting in cash for too long. As you weigh what to do with the money from the sale of your business, consider these key points.

What should you do with the money after selling your company?

When you own a business, your net worth is highly concentrated in one asset. Selling allows you to diversify your investments and de-risk your portfolio.

After receiving sudden wealth from selling a business, here’s how to consider what to do with the money.

  1. Take stock of your financial goals and timeline. Are you planning to retire? What are your income needs? Are you expecting any major purchases or new business investments? How do the cash proceeds from the business stack up against your other assets and investments? Don’t discount your non-financial goals and what you plan to do after selling the business. Going from running a company to suddenly retiring can be a difficult transition for some people.
  2. Create a formal financial plan. A comprehensive financial plan can help you analyze whether the sale proceeds will allow you to maintain your lifestyle and what variables you can play with to optimize the outcome. A strategy for managing your investments is also key: understanding your risk capacity vs appetite, balancing a need for current income and future growth, and ways to reduce tax on your taxable accounts.
  3. Put the plan into action. With the help of a financial advisor, invest cash proceeds from the sale of your business according to your plan. Also take steps to implement other parts of your plan, such as estate planning techniques and asset protection.

Investing the proceeds after selling your business

Any time you’re investing a lump sum in the market, there’s a lot to consider. A liquidity event from selling your business is a great opportunity to develop a long-term investment plan. As a business owner, growth was probably a top priority. After selling the company, consider ways to protect the wealth you’ve built.

Key considerations when investing money from the sale of a business

Is the money from selling your business enough to retire on?

Sudden wealth from selling a business doesn’t automatically mean you’re on track to living the lifestyle you want in retirement. How much you’ll need depends mostly on your expenses, not your savings.

To illustrate, consider the following simplified example, which excludes factors like inflation, market volatility, etc.:

Assume you receive $5 million dollars from selling your business, buy a $2M home with cash, and withdraw $500,000 annually to meet expenses. Assuming a 6% annual return, you’ll run out of money in year 8 – before even accounting for taxes or market volatility. If instead, you bought a $1M home and took out $300,000 per year, the money would theoretically last for over 27 years. The money is the same – but spending drives the outcome.

Reducing expenses can go a long way if you are concerned about running out of money. As you consider the best ways to utilize sudden wealth from selling a business, remember that spending drives what’s possible financially.

Don’t try to time the market.

Holding cash after selling your business just because the S&P 500 is setting new highs is a mistake on several levels. First, when investing, it’s critical to make decisions based on long-term expectations, not short-term market moves. Second, past performance is not indicative of future results. Setting new highs doesn’t necessarily mean the market has peaked and a correction is imminent, just as a pause during a sharp selloff doesn’t mean there’s not still further to fall.

Further, historical data doesn’t support the idea that investing when the market is high is likely to produce lower future returns.  Investing on days when the market closed at a new all-time high can produce better returns than investing on a day when the market didn’t set a new record.

Reduce taxes with asset location and tax-efficient investing.

If you sold a business and were paid in cash when the deal closed, you’re likely looking to invest much of the money in a brokerage account (or perhaps a brokerage account titled as a revocable living trust). A brokerage account is a flexible investment account, but unlike retirement accounts, there are no tax benefits.

However, there are ways to structure your portfolio to take advantage of asset location opportunities. Essentially, this means putting assets that produce much taxable income (like bonds) in tax-deferred retirement accounts where possible. Using exchange-traded funds (ETFs) and raising income by selecting specific lots to sell can help reduce capital gains taxes too.

Stress test your financial plan.

A key part of deciding what to do with the money after the sale of your business is understanding your risks and options. To feel confident that it isn’t too early to retire, your plan should include a Monte Carlo simulation to account for market volatility. This is the best way to stress-test a retirement plan.

Here’s why stress testing is important in retirement planning: simple straight-line retirement return calculators don’t account for the variability in investment returns or the timing of down years. The only factor is a static average annual return. Significantly, these basic compounded return calculators only assume your investment account will grow. They ignore the other half of the equation that produced the average.

Don’t rush to pay off your mortgage…or buy a house with cash.

As with nearly everything in life, there’s an opportunity cost that comes with each decision we make. Whether you share the urge to live without a mortgage or simply aren’t sure where else to put extra cash, realize that prepaying your mortgage isn’t always a good idea. If you have a low-interest rate, using the money from selling your business to pay your mortgage early might be a mistake.

As interest rates rise, it may be more difficult for new buyers to take advantage of the leverage spread. The opposite is also true: the lower the interest rate on a loan, the more advantageous it can be to get a mortgage and invest cash in the market.

Consider estate planning strategies, gifting techniques, and trusts.

Your estate plan is likely to change considerably after selling your business. Work with a trust and estate lawyer to draft a plan that suits your situation and family goals. Considering your assets and projected cash needs, discuss options to meet your charitable goals and ways to reduce your taxable estate with gifts to your family if inclined.

Also, consider techniques with trust to accomplish various goals. For example, revocable living trusts can allow you to continue to control your assets and avoid probate while irrevocable trusts offer superior asset protection, but you lose full control.

As with any financial strategy, it’s essential to ensure alignment with your overall objectives and priorities. Avoid making decisions purely for tax reasons.

For example, donor-advised funds are a great tool to help investors maximize the tax benefits of charitable giving. But if you’re not charitably inclined or passionate about the cause, are you better off? If you are charitably inclined, making a big donation the year you sell your business (and are paying tax at the highest marginal rates) can pay off.

top financial advisory firm