Do you manage your wealth like your business?

Despite a backdrop of rising inflation, conflict in various parts of the world and political uncertainty over the past couple of years – there has been an acceleration in the sheer number of wealthy individuals.

Many of these new wealth creators are entrepreneurial families that have generated significant capital value through their successful business ventures. A key issue that we have observed is how differently they approach the management of their business compared to how they manage their family wealth.  

Surprisingly, entrepreneurs who’ve spent years growing and developing their businesses tend to pay considerably less attention to ensuring that their personal and family wealth is preserved, managed and prioritised. It’s simply not what drives or interests them.

Numerous factors – some in their direct control, some indirect – are involved, but they can contribute to an outcome that could and should be improved. These factors may include a lack of prioritisation regarding the purpose of their wealth, not enough cash-flow planning to understand when it may be needed, or the absence of a long-term multi-generational view of how the family can benefit.

These factors may often be exacerbated by being a target for ‘get rich(er) quick’ sales pitches, excessive and inconsistent risks, aggressive or catch-up tax schemes, family disputes, inflation and a behavioural bias to retain control, even when the necessary management skills may not be in place.

What does managing wealth like a business mean?

Families that own large businesses are deeply engaged in their operation, both physically and emotionally. There is usually good governance, strong leadership, and regular reviews with departmental experts for their insight in shaping strategy and execution.  

Other essential tasks to administer include the rigours of cashflow, management accounts, maintaining banking covenants, and cashflow planning for suppliers, staff salaries, tax, VAT and expansion.

However, throughout the periods of accumulation and growth, the family’s need to plan their own exit and the capital needed to allow them to do all they want in ‘Life 2’ (i.e. retirement) are often missing. The dreams of charitable foundations, travel, holiday homes and improved schooling for grandchildren remain mere ideas.

Once the decision is made to sell, all focus shifts to the investment memorandum, the sales document and due diligence as the rush to deliver the sale and purchase agreement becomes ever more intense. Therefore, planning opportunities are often overlooked, and family wealth and financial priorities are deferred again until the sale is completed. Another chance to set the ‘Life 2’ agenda is missed.

After the business is sold, the client’s wealth remains the same in real terms. But now there’s a big difference: instead of owning physical businesses, where the family perceives control in terms of knowledge, action and direction, the bank is now in charge of the money. This changes the dynamic and creates a fear of losing money. This worry about ‘what ifs’ can create procrastination and more missed opportunities.

The individuals involved do not suddenly become naive – they are the same hard-working, knowledgeable entrepreneurs that they always were. However, they have let go of their baby. In return, they have a lump of cash. And while they know this needs to be addressed, it doesn’t need immediate action. Also, crucially, it may not interest them. They didn’t start a business for cash – it was ideological and their dream. The business was a living, breathing entity, and finance can be seen as dull and worrying.

Of course, the big issue is the absence of a plan. The family has worked with rigour all their lives to drive value without daring to dream about what to do afterwards. With the cashflow and forecasts reviewed month by month, quarter by quarter in their business no longer in place, there is nothing to measure success or failure against. This is coupled with an overwhelming sense of responsibility to be the custodian of this capital for themselves, their needs and those of their family and future generations. Compounding these problems can be a lack of real interest in the subject matter. Because, let’s face it, pensions, investments and tax planning are hardly exciting. Indeed, if they appear so, it’s probably because someone is promising something that’s too good to be true. With all this in mind, it’s no wonder that people can make rash and or regrettable decisions.

Why should a professional help manage personal and family wealth?

Having someone to manage your wealth is not a privilege of the few but a common and helpful service for many wealthy people. A professional can help hugely. First, you must choose a credible, reliable person and firm. It helps to like them because, over time, you will need to trust them.

These key ingredients will then begin to allow you to manage as you would a business. Set the strategic plan, assess the level of risk and reward you can adopt or seek, manage the cashflow with the expected costs, and make provision for the unknown unknowns. Agree on how you will measure and report, and what management information (valuations) you want to see – on one page, measured against your own benchmark, or in-depth Excel analysis? Think about involving the family in some format, through stakeholder pensions, ISAs (individual savings accounts) or charitable trusts – all are ways to engage in the financial decisions and consequences involved.

Most business owners will have had high levels of insight into every aspect of their business operations. This includes everything from how the company is insured to what maintenance is required on machines, buildings and IT networks, as well as the costs associated with these and the entire operation. Every detail is accounted for and planned, so why not apply these principles personally?  

Managing wealth like a business is an ongoing process that is continually evolving as improvements are made. This remains a challenge for many wealthy families, as a considerable mindset shift is required to move successfully from family business management to family wealth management. Still, this change is vital if wealth preservation across generations is to be achieved.

In our experience, client’s that we work with who plan and engage closely with the wider family are far better placed to achieve all they want. These individuals generally have much better outcomes financially, but above all else, they are relaxed and enjoying life – which, as we all know, is far more important.

How Brooks Macdonald can help you

We’ve helped clients meet their financial and investment goals for over 30 years. Contact us to see how we can help you with your goals.