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Family Receives Sound Financial Guidance Through Liquidity Event

How To Invest Proceeds Might Unite Or Divide Husband And Wife

The situation presented here is an illustration based on real life circumstances. It demonstrates the approach Whitnell might use to resolve a complex set of issues related to the transition of a privately owned business. Please note that we have changed the names and details of this client to protect their privacy.


The Client Situation

Andy is a 43-year old executive in the garment industry. He is an intelligent and capable senior leader in a private company which is about to be acquired. Andy has worked in the same company for nearly 20 years now and has advanced through the ranks to become the CEO. While the company has several stakeholders, Andy’s equity is about to be worth several million dollars after the company is sold. Andy was not an original investor or founder. He earned equity in the company through hard work.

Andy has two wonderful children and a loving wife of 23 years named Michelle. Their family lifestyle has always been Michelle’s responsibility to manage and she has been pleased to see their personal net worth grow as Andy’s career has grown. Michelle is a happy wife, but she has some concerns.

Michelle was raised in a lower-middle class family and never expected to have anything more than what they have today. Through diligence, saving and wise investments, Andy and Michelle now have more than $400,000 in retirement accounts. The opportunity to see this number grow by more than 10 times is almost more than Michelle can comprehend. Andy, however, thinks this might be just the beginning.

Andy always expected to be successful in business. His father raised him to have a strong work ethic and Andy has been diligent in his career. Andy has come to have a high degree of confidence in his ability to shape the outcomes of his business ventures. This is why he wants to roll the dice. Michelle does not agree.

The company that is acquiring Andy’s garment business has made an attractive offer. They want Andy to take on a senior VP role in the new company. They have even offered him the opportunity to forego a cash payment on his current equity and instead convert 100% of it to equity in the new company. This is highly attractive to Andy, but it makes Michelle very nervous.

Andy sees it this way. He could take the $4 million in cash from the sale of the garment company and continue working the rest of his life. Or, he could convert the entire $4 million into equity in the new company and work for another 10 years and help that company grow. Andy believes his $4 million in equity would then be worth over $20 million. Andy is an optimist, but he has a strong track record of producing results.

Michelle sees it this way. She never expected anything but the quality of life they have today. Their home, children, family-life and financial security are far more important to her than anything else. She believes that they will not need more than the $4 million cash that Andy is about to receive. To Michelle, it simply doesn’t make sense to risk any of that in a new company over which Andy will have less control.

Andy loves Michelle and wants to give her the peace of mind that she desires. Andy recognizes that he would be putting the family’s nest-egg at risk if he converted it all to equity in the new business. If that equity lost value, Andy would feel horrible, as if he let his family down.

Michelle loves Andy and wants him to have even more career success. She knows that work is an important part of Andy’s life and he needs a challenge. Michelle also recognizes that, if they did not convert their equity and if the stock in the new company were to increase substantially in value, they would miss a once-in-a-lifetime opportunity.

Our Analysis & Recommendations

When we first met Andy and Michelle, we had several in-depth conversations about their situation and their goals. It became clear to us that Andy had the unbounded optimism of an entrepreneur. Michelle was far more conservative in her outlook.

It was also clear to us that Andy and Michelle were equity-rich and cash-poor. How they managed the $4 million in equity from the garment business was a very important decision. The right plan could produce multi-generational wealth. The wrong plan could leave them devastated.

We could sense the weight of the decision and how it was impacting their family and marriage. Their personalities and childhood experiences predisposed them to lean in opposite directions.

While both Andy and Michelle were willing to discuss middle ground, they were not certain what that middle ground would look like or how it might impact their net worth in the long-run and their financial security in the short-term.

We gathered all of their financial information and began to build models for several different scenarios. We modeled three approaches:

  • Investing 100% of the equity in the new company.
  • Investing only a portion of the equity in the new company.
  • Investing none of the equity in the new company.

We also took into account how Andy’s salary and retirement accounts might perform in each of these scenarios, given that he intended to keep working. As a high income earner with a good retirement plan, Andy would continue to add to their net worth through his work.

We presented the scenarios and our assessment of the upside and downsides to all three models. We then awaited their decisions.

Our Services For This Client

After carefully considering our analyses, Andy and Michelle opted for a multi-tiered approach.

  • We converted 25% of the equity from the garment business into equity in the new business.
  • We converted 50% into a diversified investment portfolio with an appropriate allocation strategy to achieve their long-term goals.
  • We converted 25% into a safety-net of bonds.

This approach felt right for Andy because it allowed him to invest in the new business and demonstrate to his new colleagues that he had a stake in the game. But it also allowed him to diversify his holdings by investing in other companies, thus reducing his risk of exposure.

This approach felt right for Michelle because the family’s core needs were accounted for in a nest-egg that could be drawn upon if necessary. Michelle also liked how the diversified investment portfolio prepared them for the future.

The Client’s Results

We believe we helped his family realize greater peace of mind through what was a very difficult decision process. On their own, they struggled to see how any position except the one to which they were predisposed could produce a happy outcome for their family.

Our careful analysis, based on realistic projections, made the decision much easier for both of them. Our financial models gave them opportunities to talk about how each scenario might meet their individual needs. The raw numbers took the mystery and uncertainty out of the picture.

The financial models made it easier for Andy and Michelle to feel their way through each scenario and achieve common ground. Instead of a house divided, they became a house united with a shared vision for their future.

The situation presented here is an illustration based on real life circumstances. It demonstrates the approach Whitnell might use to resolve a complex set of issues related to the transition of a privately owned business. Please note that we have changed the names and details of this client to protect their privacy.

The information contained in this case study is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.

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BOB LEGAN - view full bio

mia erickson

“I enjoy serving ultra-affluent families because I value trust and discretion. They often have very complex financial lives and multi-generational stakeholders who see things in different ways. I find satisfaction in leading a team of advisors in a united effort to serve these families exceptionally well.”