What Entrepreneurs Should Do After They Sell Their Company

6 min read · 7 years ago


As an entrepreneur, you may eventually be fortunate enough to build up your company to the point at which you are able to sell it for a considerable profit. At that time, you will likely be faced with the daunting task of what to do with perhaps the most significant single influx of funds in your working lifetime.

I have been involved in numerous sales of companies. From my experience, I’ve learned that it’s essential for the entrepreneur, both before and after the sale of a company, to act expeditiously to protect proceeds, minimize taxes, and plan for his or her family’s financial future.

In short, founders who sell out must revisit plans for personal finances that were in place prior to the sale and adjust for the new and improved reality. What follows are suggestions I’ve given to other entrepreneurs that, I believe, will be helpful as you chart your own course.

Protect Your Proceeds

The most important step you should take after successfully selling your business is to protect the proceeds. Here are three ways to do that:

  • Diversify Your Holdings. If you received cash from the sale, immediately consider a diversification plan for the proceeds. Think about a combination of mutual funds, municipal bonds, money market accounts, and real estate. Your particular diversification plan will depend upon the amount of proceeds, your other assets, and your age. Think about hiring an experienced financial planner to guide you through the process.
  • Hedge Your Bets. If you received stock instead of cash as a result of the sale of the company, immediately determine the best way to hedge against a downside on the stock you receive. There is no worse feeling than walking away with what you think is a significant return, only to see it evaporate when the stock you received starts to plummet. And this has happened to plenty of people. Start planning your hedge strategy even before you close the sale of the business. Enlist the help of a knowledgeable stockbroker or financial planner.
  • Review Your Liability Protection: Now is the time to review what exposure you have to liability. After all, you now have significant assets that someone could go after. Make sure you have adequate primary and umbrella insurance coverage. Analyze whether you are exposed to personal financial risk in any other businesses you own—for instance, if you are involved in general partnerships or sole proprietorships—get out of those quickly by incorporating or forming an LLC. Incorporation can ensure (if done properly) that the entity, rather than you personally, is liable.

Minimize Your Taxes on the Sale

One of the major considerations connected with the sale of your business concerns minimizing taxes that result from the disposition. Here are 10 ways to do this:

  1. Structure the Transaction Beneficially. If you are getting stock instead of cash from the sale of the company, you should be able to receive the stock tax-free if you structure the transaction properly. Make sure you have an experienced corporate and tax lawyer to ensure proper tax treatment.
  2. Seek Capital Gains Treatment. Capital gains on the sale of stock receive much better tax treatment than ordinary income tax treatment. So review with your tax advisor the types of payments you are to receive under the sale. Perhaps you can optimize tax treatment by reconfiguring the payment. For example, you may decide that a two-year, $200,000 consulting agreement after the sale is not as advantageous as a higher purchase price and lower consulting payments.
  3. Take a Loss on Other Investments. Prior to year-end, consider selling a losing venture or losing stock to offset some of those gains from selling your business.
  4. Consider Tax-Free Investments. Returns are not very high, but if you are looking for a safe, tax-friendly investment, consider investing some of your money in tax-free government or municipal bonds for at least a portion of your portfolio. This is particularly advantageous for a high-income individual.
  5. Remember Charitable Donations. While donations should not be made simply for tax purposes, but rather for philanthropic reasons, you can always make a couple more at year-end to lower your tax bite. Remember to get receipts.
  6. Consider Gifts. As of 2015, you can give up to $14,000 a year away tax-free to each person you choose. (By splitting their gifts, married couples can give up to twice that amount.) You may even be able to give more by using your lifetime amount of $5,430,000 per Internal Revenue Code Section 2501.
  7. Max Out Your IRA or Other Retirement Plan Contributions. This is a legitimate way to lower your taxes for the year, so make sure you have taken advantage of IRA or other retirement plan contributions that you are allowed to make.
  8. Prepay Your State and/or Local Taxes. If you are fairly certain that your personal income tax bracket will not be higher next year, and you are not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
  9. Pay Your January 1 Mortgage Payment Early. If you pay your January 1 mortgage payment on or before December 31, you can take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you the 1098 form.
  10. Defer Income. Unless you have reason to believe that next year will bring you a higher income and move you into a higher personal income tax bracket, you may want to defer income until after the first of the year. If you are self-employed, for example, send the last invoices out late in December so you will more likely receive payment in January.


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Plan for Your Family’s Future

Now that you have made some money from the sale of the business, you should scrutinize any plans you have made for your family’s future and for your estate. Although you may have already taken care of some of the following items, you will want to revisit these eight:

  1. Make a Will: You should have a will drawn up that stipulates where assets and property will go once you die.
  2. Add a Living Will: Many people today are drawing up living wills. These stipulate medical and health care instructions to be carried out if you are on a life-support system. A power of attorney should be named in conjunction with a living will.
  3. Review Beneficiaries: As your family situation changes over the course of your lifetime, you may want to change the names of beneficiaries not only on your will but also on life insurance policies and other documents that list beneficiaries.
  4. Provide for Child Guardianship: If you have minor children, it is imperative that you take time and special consideration when deciding who will take guardianship of your children in the event that you die. This should be stipulated in your will.
  5. Form Trusts: Setting up a trust is something you may want to consider to maintain greater control over your assets and have your wishes carried out once you die. Trusts will also avoid the lengthy probate process. There are a variety of trusts available.
  6. Navigate Logistics: It is an emotional time when a loved one passes away. Tension can be exacerbated when those closest to the deceased cannot find important documents, keys to safety deposit boxes, financial statements, and other necessary information. It is essential that you create a list of the location of all-important information and give the list to someone you trust.
  7. Consider Gifting: As I mentioned in the previous section, gifting is a means of giving away tax-free (subject to limits) to any person you choose. This tactic is a way of shrinking a large estate to help your beneficiaries avoid significant estate taxes.
  8. Establish a 529 College Savings Plan for Your Children: Much like a 401(k) is a savings plan for retirement, a 529 plan is a college savings plan—except you set these up on your own and not through your company. These state-sponsored savings plans let you build up tax-free savings for tuition in any university in the country. You will owe taxes and penalties if you use the savings for non-college-related purposes.

If you take into account and act on these important suggestions, you can make sure that your hard work in starting, building, and selling your business will be enduringly beneficial for you and your family.  

About Richard Harroch

Richard Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on investing in Internet and Digital Media companies. He is the author of several books on startups and entrepreneurship. He was also the founder of several Internet companies. He is the co-author of Poker for Dummies andWall Street Journal bestselling book on small businesses. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital.

Copyright © Richard D. Harroch

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