Preserving hard-earned assets is an important consideration for business owners who successfully build an operating business. The decision to take assets out of the business seems risky to many business owners who are accustomed to being in direct control of their assets.
But diversifying wealth outside the business does not mean you have to relinquish control of important decisions. You may require help in evaluating investment alternatives, but the investment professionals you hire can still operate at your discretion. And there are many advantages to diverting substantial assets from the business. These benefits and other liquidity issues are discussed in this article.
BenefitsThe benefits to diverting substantial assets from the business include:
- Diversifying your assets solves the problem of having “all your eggs in one basket”.
- Liquidity from the business provides cash for future gift tax or wealth transfer (inheritance) tax obligations.
- If you involve the younger generation, access to liquid funds provides them opportunities to learn first-hand about investment alternatives and, hopefully, to become interested in the wealth management process.
- The younger generation may also consider starting new business ventures that they might not have the courage to try otherwise, if you provide financial support and encourage their efforts
- New liquidity for families and philanthropic goals also creates an opportunity to share the experience of giving away money to worthy endeavors. The process often brings the family closer emotionally and clarifies family values.
- If you have managed liquidity inside the operating business previously, some financial manager has been burdened with your personal investments in addition to his business responsibilities. It is beneficial to the company for the “dual role” manager to be released from overseeing your personal affairs, so he can return to his primary job in the operating business.
Wealth ManagementEntrepreneurs who enjoyed the challenge of building a family business may not feel comfortable being in the wealth preservation business because they have been focused on making money rather than investing it for so many years. Unfortunately this lack of familiarity with the investment markets often keeps business owners from diversifying their assets outside the original business.
ConclusionBeing in the wealth management business involves more than simply hiring money managers to invest cash in different investment strategies, such as marketable securities, real estate, oil and gas or other operating businesses. Critical to the success of this type of business are components that include developing a family philosophy about the goals for the wealth, establishing an investment policy, selecting good professional advisors, and getting family members interested in and educated about the process.
This article has been partly extracted and modified from Hamilton, S. (1991). New Beginnings: Generating Liquidity from the Family Business. 'Proceedings of the 1991 Family Firm Institute Conference', October 16-19, Beaver Creek, Colorado, USA.