By Nic Horn
Entrepreneurs typically devote decades to building up their businesses and companies' balance sheets but rarely put the same care and attention into managing and preserving their personal wealth.
Here are four tips for entrepreneurs who want to get to a place where they can provide for themselves and their families even if the original source of their wealth is concluded.
Don’t tie all your wealth up in your business
Not putting all your eggs in one basket is easier said than done for most entrepreneurs, who have worked tirelessly for decades to create stable and successful businesses.
Many entrepreneurs are motivated to build solid and resilient businesses that can provide the passport to financial freedom, which will allow them to live their hopes, dreams, and aspirations.
It is an investment of personal time and effort that can pay off handsomely. If an entrepreneur’s wealth is fully tied to one business or industry, it can, however, put them at significant risk when the unthinkable or the unexpected happen.
We all remember what happened to many businesses during the Covid-19 pandemic. It’s about the concentration of risk.
What you want to do is take some of that risk off the table over time. This is counter-intuitive for entrepreneurs because they may reason that they would rather keep the money in their business, which builds their wealth; this is, however, risky.
To minimise risk, it’s better to transfer some funds to a different pool where they can be diversified and preserved.
Entrepreneurs need to get into the habit of extracting some money from their businesses consistently over time and diversifying it across different investment classes and jurisdictions for long-term financial security and with the guidance of an experienced and trusted wealth manager.
Then no single event can destroy your wealth. We witnessed first-hand how this happened just a few years ago.
Build your personal financial freedom
For entrepreneurs who have worked hard for their success, perhaps without much help over the years, it can be difficult to relinquish full control of their personal finances.
It’s a big moment in an entrepreneur’s life when they realise that a qualified expert can make unemotional decisions that will enable them to gain financial freedom away from the business. It’s almost like appointing a personal financial director.
What an independent expert can do first is take the emotion out of any investment decisions because emotion is the most dangerous element in investment decision-making.
What they can then help entrepreneurs achieve is to build a separate wealth pool that is accessible and liquid. Liquidity is something that entrepreneurs may not always have.
All their wealth is often tied up in their businesses. Liquidity ultimately means having some money tucked away that you can access immediately in times of crisis or as your circumstances change—at no cost.
Business assets are highly illiquid and subject to risk, and therefore they can’t always be used as a catch net in a crisis or as a pension in old age. Do not assume that your business can be your pension.
If you have a heart problem, you go to the best heart specialist, someone with an established track record. It’s advisable to do the same with your money if you want to put it in a safe place where the power of compound interest can do its magic at an acceptable level of risk.
Diversification, diversification, diversification
If you are a South African business, along with your other assets like houses and cars, it means you are almost exclusively exposed to South Africa. Thus, it makes sense to diversify yourself into other countries and currencies.
Citadel’s current Houseview indicates an optimal offshore exposure of over 50% of one’s financial assets to offshore. South Africa is less than 1% of the world in global economic terms, so it makes no sense to allocate 100% of your wealth here.
Offshore markets give you exposure to asset classes and companies you cannot access here, as well as, of course, other currencies.
Create financial safety for your dependants
Many entrepreneurs have successful businesses, but their children and other dependants don’t have financial security because there is no resilient structure around their wealth.
It’s as basic as ensuring your will is in place. Have you done estate planning? You can destroy what you have built and impact the lives of your family and employees if you don’t have the right financial structures and processes around them in place to protect what you have built.
If you have a trust, the trust administration must be above reproach; for example, it’s important to hold meetings with accurate minutes. Decisions must be made by the trustees, so the trust is not seen as your alter-ego.
Your family must know where to access everything and what to do when the time comes, with the assistance of trusted advisers. This is very important for everyone’s financial safety.
It is important for entrepreneurs to realise that proper fiduciary structuring can help them as well, as it can enable them to enjoy their own lives and retirements free from financial stress.
If you keep working into old age, you should do so because you want to, not because you have to.
Plan to put enough away or be brave enough to let go of your business so that, even if everything goes away tomorrow, you can continue living a quality life into your later years, and everything you have worked for is kept safe for yourself and your dependants.
Nic Horn, Citadel Director and Regional Head for KwaZulu-Natal.
*The views expressed here are not necessarily those of IOL or of title sites.