Selling a Company – How to Invest the Proceeds

Entrepreneurs are experts at making their company successful. During and after the sale of a company, however, questions arise that most entrepreneurs have hardly ever dealt with.

The sale of a company presents entrepreneurs with new questions. Am I ready for the sale? Is my company ready for it? Where and how can I find reputable buyers? What is the valuation of the company? What should I disclose in the sales documentation? Do I still want to have a role in the company in the future, and if so, which one? How will we keep the employees on board? As there are professionals with a great deal of expertise in this area, it usually makes sense to involve them. Once the sale has been finalized, the next questions arise - this time concerning the investment of the sales proceeds.

Experience with Investments

Entrepreneurs who have been enjoying high profits over a long period of time have built up expertise in these areas and can rely on their experience. If the previous wealth manager has done a good job over several years, there is no reason why the proceeds of the sale should not be entrusted to this partner. If the performance of the current wealth manager has never been reviewed and compared, the sale of the company is a good time to tackle this.

However, we often come across entrepreneurs who have kept their salaries relatively low. They may have treated themselves to a nice house or a hobby, but the jump in wealth only comes after the company sale. Just as with the sale of a company, you can try to answer the questions yourself or call on the help of a professional.

Defining Goals

The first important consideration is the goals you want to achieve with the assets. Realistic goals relate to the size of the proceeds. With two million, the focus is usually on personal needs such as your retirement provision. With 20 or 50 million, the next generation or even the generation after may well be considered if there are children. For large amounts or in situations without children, the establishment of a foundation can also be considered.

Your Own Role in Wealth Management

Before searching for a good wealth manager, it makes sense to think about your own role. Do I want to manage my assets myself? Do I have the time and desire to do so? Do I have the necessary expertise? Or would I prefer to delegate wealth management and have time for other issues? Do I already have an idea of how my assets should be invested?

The answers to the above questions will help you to define your own role. In practice, we often come across entrepreneurs who delegate wealth management for the majority of their assets and invest a smaller portion themselves. In our experience, entrepreneurs often want to invest part of their assets in start-ups and supervise these investments themselves. Such investments can often be coupled with the transfer of their own entrepreneurial experience. From a financial point of view, direct investments make sense, but for risk reasons they should only be made with a limited portion of the available funds. Once you have defined your own role, you can start comparing possible the wealth managers.

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When the news of the sale of a company hits, bankers quickly flock to the seller. Everyone, of course, promotes their own company and it is not easy to evaluate their services objectively. This is mainly due to the fact that Swiss private banking is extremely opaque. The information needed to make an informed decision is not publicly available. The websites of private banks and independent wealth managers rarely provide more than a few empty phrases.

The lack of transparency protects the less efficient providers. Very few banks and independent wealth managers have a clear profile that sets them apart from the competition. As a result, the choice of wealth manager is almost always based on contacts. There is a reason why bankers like to mingle at golf clubs or classic car races, where they seek out contacts with potential wealthy clients. If you want to make a well-informed decision for a long-term client relationship with a wealth manager, you have to take make your own evaluation.

In order to assess the quality of potential providers, it is first and foremost performance and fairness that should be closely examined.

Performance

In order to get a good picture of a provider's performance, the returns achieved in the same risk categories should be compared over several years. This data is only publicly available if the respective investment strategies are also offered as investment funds. This is not the case with most providers and the returns achieved are only available upon personal request. Having some skepticism over the presented returns is healthy. The best way to check the information is to request anonymous bank statements with return data over several years.

Particular attention should be paid to the treatment of costs when comparing performances. Net performances, i.e. figures from which all costs have been deducted, are the relevant ones for customers. However, banks often work with gross figures. This makes their performance look good in comparison with the competition. Objective comparisons of returns are only possible if all costs are taken into account.

Costs

While future returns are uncertain, costs are defined. Many investors therefore pay more attention to costs than to the performance achieved in the past. This entails the risk of forgo potential returns.

Hidden costs are pervasive in Swiss private banking and should be paid attention to. Many banks, but also independent wealth managers, like to sell their own products such as investment funds or structured products. In some cases, advisors are incentivised to place as many of their proprietary products as possible in client portfolios. As these costs are deducted directly from the assets in the corresponding products on an ongoing basis, they are usually not visible in the asset management costs shown. Customers are often offered supposedly favorable all-inclusive prices, but actually pay for excessively expensive asset management due to product fees. A difference of around one per cent per year between the stated and actual costs is unfortunately not unusual.

Fairness

This brings us to the point of fairness. The financial industry is characterized by a substantial information asymmetry between providers and buyers. In this situation, there is always a risk that the provider will utilize its knowledge advantage and sell the customer unnecessary or expensive products. Fair providers ensure that there are no conflicts of interest between advisors and clients. However, anyone who pays their advisors large bonuses if they generate high fees from their clients is most certainly not a fair provider.

Retrocessions are still paid for investment products from third-party providers. This means that if a wealth manager uses investment funds from another bank, they receive remuneration for this. These retrocessions are still permitted, but their amount must be disclosed to clients. Most providers deal with this point in the general terms and conditions and specify ranges of "possible" compensation.

Reputable providers use their own or third-party investment products with a minimum margin (so-called institutional tranches) in asset management, on which no retrocessions are paid. If investment products with normal costs are used, fair providers waive the asset management fee for the corresponding amount.

Conclusion

Choosing a competent and fair provider that is a good fit for your individual needs is a time-consuming task with many stumbling blocks. Anyone who has just completed the sale of their company usually has no desire to invest a lot of time on this. Therefore, in most cases it makes sense to work with a professional who knows both the needs of investors and has a deep understanding of the wealth management market. There are still far too many banks and independent wealth managers on the market who do not provide any real added value, precisely because of the lack of transparency. Entrepreneurs are used to looking for the best solution and not taking any short cuts. Investing the proceeds from a company sale usually involves substantial funds. A difference in performance of one per cent or an additional one percent of hidden costs can make a big difference over time. That is why it is definitely worth taking a closer look.

This article was published in March 2023 in the newsletter "Steuer- & Finanzratgeber für Unternhemen" (in German) by WEKA-Verlag.