Wealth creation invariably thrives on the bedrock of entrepreneurship. Most fruitful ventures endure a typical business life cycle beginning with the start-up phase of teething realities, followed by rapid growth leading to peak performance, and culminating into the last leg of maturity when "monetisation" event not only marks the end of the "wealth creation" voyage, it also causes an abrupt influx of big money that has the exiting entrepreneur lock horns with the formidable challenge of "wealth preservation." Seamlessly managing the transition - from wealth creation to wealth conservation - calls for an honest analysis and acknowledgment of the underlying behavioural and functional dimensions of this new challenge.
In the wealth creation phase, the entrepreneur is essentially a risk-taker and thrives on concentration of risk. Most of the entrepreneur's personal wealth is held in a single stock; that of one's own company. The entrepreneur normally is a very hands-on manager, exercising significant day-to-day control over every business decision, be it big or small. It is imperative that the entrepreneur is nimble, constantly innovating and responding to fast-evolving market environment and competition.
However, post stake sale, the erstwhile risk-taker must quickly transform into a risk-manager and this requires the entrepreneur to let go of some of his natural instincts of concentrated risk taking, control and constant activity. The two pillars of successful wealth management are; a adequate diversification of one's wealth across asset classes and multiple instruments within each asset class, given their return variances' and a patiently sticking to disciplined asset allocation framework with allocation of funds within each asset class being made to experienced fund managers chosen in consultation with one's accredited wealth advisor.' The entrepreneur needs to curb his natural instinct to respond to each and every transient market move and avoid excessive trading and churning of portfolio, which can lead to significant under-performance of one's portfolio vs. index benchmarks - not counting additional hit of transaction costs and taxes.
Long term wealth preservation, calls for detailed planning, often starting well in advance before the actual monetisation event. One key element is adopting, and if needed, restructuring holding structure of one's operating business to maximise post-tax proceeds in eventual divestment event within the over-all agreed enterprise value agreed with the investor/buyer and also ring-fence his personal assets against potential deal related contingent liabilities.
Other key aspect of planning involves understanding one's financial persona (needs, risk tolerance):
Assessing annuity income needed to replace salary/dividends from current business targeted to be sold.
Big ticket future expenses - purchase of property, funding kid's college education.
Future plans - starting a new venture, retiring and possibly engaging in philanthropy and on the basis of the same, estimating the residual time that can be devoted to wealth management.
Understand personal comfort zone of portfolio volatility and draw-downs to avoid anxiety later.
Based on individual need, asset size and costs involved, the entrepreneur can choose to either set up a native family office or hire a third-party professional family office to manage the investment portfolio by identifying best investment products and fund managers making allocations basis over portfolio level risk: return objective, monitor portfolio performance, taking timely corrective actions when necessary. In addition, to perform allied administrative activities that include control financial reporting and tax return filing.
Managing expectation of family members, especially next generation is the key for long term wealth preservation. Sudden influx of liquid wealth is often a harbinger of impending family disputes based on clashes within family members on end-use of money and decision making. To avoid such eventualities, these days we see many entrepreneurs transferring their wealth to a family trust overseen by professional trustees whose role is to manage the family estate as per rules set by the settlor and to execute the trust settlor's will a distribute income/assets to identified beneficiaries that include family members, others including charities, endowments.
In conclusion, I must mention a highly pertinent but seemingly paradoxical point. I have met many entrepreneurs who treat wealth creation as a by-product of their entrepreneurial journey. They do not measure their success by the financial rewards reaped through the sale of their ventures. Instead, they value the luxury of time and financial capacity that such a sale event provides them, enabling them to leave behind lasting legacies in the form of endowments/charitable trusts to fund public causes close to their hearts. It includes funding research and infrastructure at their alma mater educational institutions along with funding public healthcare, skilling of youth, etc. It's this very dispassionate attitude to wealth, above all else, that helps most wealth creators ace the art and science of wealth preservation.