You just exited your company…but where do you invest the proceeds?
I’ll never forget the day.
After seven months of excruciating negotiations, we finally closed a deal to sell the media company my wife and I had started nine years earlier.
We were notified that the initial payment would be wired to our bank account that very day.
I continually refreshed the browser page for my online bank account. The seconds seemed to last days.
Then…there it was.
Eight glorious figures. It was more money than I’d ever seen at one time.
I had two thoughts.
The first was…we did it.
The second was…what the heck do I do with all this money?
I’ll share what I learned below in the hope that it helps you assess your options and make a plan that’s appropriate for your future.
1. Don’t get rattled
Our buyer sent out a press release about the sale.
So, over the next few weeks, I received emails and calls from brokers and investment advisors making recommendations and wanting to handle our money.
While a few were thoughtful, most of these people were chock full of scare tactics about why we must move immediately — for whatever reason. Their scenarios ranged from short-term market opportunities to the possibility that the money wasn’t safe in our checking account.
My advice? Take a deep breath and relax.
There is no need to rush this process. It will take time to distribute your cash to all the places that make sense.
Remember, the number you exited for is not even 0.1% of what Elon Musk is worth.
2. Taxes
Hopefully, you already know this, but work with your accountant to understand how much you’ll need to pay in taxes due to your successful exit.
Immediately put that amount into a “do not touch” account.
Pretend you never had that money. Either way, it’s going to hurt, unless you live in the Bahamas or the Dominican Republic.
3. No one size fits all
Every business owner who exits their business has different goals. And that’s where you must start.
What are your goals? What do you want to do with all this money? Do you want to travel? What about charity? How about your kids?
For us, it was pretty simple.
The first goal was to make sure that we never had to worry about money again.
That meant we needed to put a portion of this cash into investments that were “safer.” After talking to my wife, this meant that, if there was a serious global recession, we would still be okay (or as close to okay as possible).
The second goal was to make sure our children were taken care of.
The third goal was to consider our close friends and family.
The fourth goal was to invest in our charitable efforts.
The fifth goal was to invest in assets that grew our total net worth over time.
Let’s go through each one.
Our Goals
Pot 1: Don’t lose it
a). Cash
Depending on the value of your exit, take three years of your living expenses and put it into cash and cash equivalents.
You can split this amount three ways.
First, take one-third of this and keep it in actual “paper dollars.” Put it in a safe or a safe deposit box at your bank.
Second, take another third and keep it in cash at your financial institution. This could be a bank or a brokerage account. Just be sure it’s not “in” anything…just simple cash.
Third, take the remainder and find a money market account. Something around 1 or 1.5 percent is fine.
I understand that the value of this portion theoretically loses money due to inflation, but that’s not the point. This is both your disaster relief fund and your “sanity stash.” It’s your “just in case” reserve.
b). Real Estate
What I love about real estate is that, unless we start moving to Mars, they aren’t making any more of it.
It’s a fairly safe market.
We decided to pay off our mortgage so we owned our house outright. We also purchased a small rental property that created a monthly cash occurrence.
You can also invest in real estate online by crowdfunding into real estate projects (we did a bit of this). Check out companies like Fundrise and Crowdstreet.
Depending on how you look at it, having 10 percent of your net worth in cash (and cash equivalents) and 10 percent in real estate is my preference.
Pot 2: The children
You want to protect your estate (what you leave to your family) just in case something horrible happens.
And, even if you live a long life, you don’t want to give away your gains to double taxation. If you live in the United States, every state handles the “death tax” a bit differently.
To optimize taxes, we worked with our estate lawyer to create a trust, and to minimize the estate taxes as much as possible. In addition, a trust deed gives direction on what happens to certain assets and your children (depending on age) when you pass.
If your children are older and you pass, you decide what you want to give them — and when they get it. For example, your 18-year-old child might not be ready for a million-dollar check. I can’t recommend trusts highly enough.
Once our trust was complete, we funded our children’s 529 (education) accounts so we’d never have to worry about their education expenses.
Pot 3: Friends and family
In Ohio (where we live), you can gift up to $16,000 per person to an unlimited number of people, without the gifted having to incur taxes.
My wife and I made a list of people who had a huge impact on us or, frankly, needed the funds. We decided not to do this all right away (we made these gifts happen over a two to three year period).
Pot 4: Charity
We took a portion of the exit proceeds and created a private family foundation. This is a type of private foundation, funded by you, where you distribute yearly grants to your important charities.
Each year you need to distribute, at minimum, five percent of the total foundation value (at least in Ohio).
The good news is that the funds can go into an investment account and grow over time. I recommend something simple like an S&P 500 index fund.
Each year, my wife and I fund our favorite charity, the Orange Effect Foundation (speech therapy grants), as well as gifts to our former universities and Cleveland-area musical productions.
I recommend setting aside 5 percent as a long-term charity investment.
Pot 5: Grow
If you are following this model, you already have 25 percent (or so) of your funds allocated; 10 percent in cash, 10 percent in real estate, and five percent for charity.
Before we get to the remaining 75 percent (this is the amount of money we are looking to grow over time), there are a few things to consider.
First, you should allocate this money so that you can sleep at night. If you are constantly worried about this pot or checking stock prices all the time, there is a problem.
Second, I have a good handle on investments, but I know enough to know that I don’t know everything.
So, I decided to take half of this pot and manage it myself (through a self-service broker like Fidelity or TD Ameritrade) and take the other half and have it professionally managed.
For the professionally managed part, I decided on a firm that charged an annual management fee on the total amount managed (say 1 percent), rather than choosing an advisor that gets paid from what they invest in for you (loaded mutual funds or other investments).
This way, I know exactly what I’m paying, and, if at any time I want to remove the investment advisor, it’s already in an account that I can see and manage.
If you go with a traditional investment advisor, often they hold the money/assets in their own accounts and make all the trades.
I like it better when the advisor does not own or control the trading platform.
Our investing formula
Now, of the 75 percent cash you have remaining, I like this formula:
- 45 percent US stocks with an equal distribution of small-cap, mid-cap, and large-cap stocks, as well as a division by sector (technology, healthcare, etc.). If you are more aggressive, you can lean toward the tech and healthcare sectors rather than energy or consumer staples. If you feel comfortable owning particular stocks that you understand, that’s great, but ETFs make it simple and can get you the diversification you need
- 10 percent international stock holdings
- 15 percent bonds; a mixture of US, international, and corporate bonds
- 5 percent alternative assets
For the five percent alternative, I like to see a mixture of hedge funds and cryptocurrencies. For crypto, I like Bitcoin, followed by ETH, as well as several NFT holdings (I would put this into the art/collectibles category).
Most people don’t realize that the best-performing sector over the last 50 years is high-end art. I believe the future of this is digital, thus non-fungible tokens.
This is a bit more advanced than most, so if you are a little skittish stick with Bitcoin and ETH. Even through our current “crypto winter,” I am still a fan of this strategy.
Diversity wins
If you execute this correctly, you should have created a remarkably diverse portfolio.
And that’s what we want…diversification.
Diversification might not necessarily give you huge returns, but it does ensure that you can sleep at night and it will grow your hard-earned exit dollars over time.
In closing, let’s review what your exit could establish: US Stock Holdings. Cap and sector diversified – 45 percent
- Bonds, diversified by location and structure – 15 percent
- International Stock Holdings, diversified by country/region – 10 percent
- Cash/cash equivalents – 10 percent
- Real estate – 10 percent
- Charity – 5 percent
- Hedge Funds – 2.5 percent
- Crypto/NFTs – 2.5 percent
As a final note; I am not a qualified investment advisor. I am speaking only from my personal experience. Please seek out qualified help when you are ready.
If you’re reading this article because you have a chunk of change in the bank, congratulations on your successful exit!
