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Many business owners focus a majority of their time on the day-to-day operations of running and growing their company, concentrating more on the "now" than "what comes next". Sarah Charles with DHG Wealth Advisors joins us today to discuss what most business owners may have not considered or appropriately planned for - retirement, new investment opportunities and other long-term financial planning goals as it relates to succession.



[00:00:09] JL: Welcome to today's edition of DHG's GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.


[00:00:58] JL: Many business owners focus the majority of their time and energy on the day-to-day operations of running and growing a company. They are likely thinking about, "Well, what does my business need now," more than what comes next. We've invited Sarah Charles with DHG Wealth Advisors to discuss what most business owners have not considered or appropriately planned for. Things like retirement or new investment opportunities. Sarah joins us today to talk about why it's so important to focus on long-term goals and the final rule of financial planning when it comes to succession.

Sarah graduated cum laude from Duke University with a BA degree in economics, and she holds an accredited investment fiduciary designation from Fi360. Born and raised in New York City, she brought her talents to DHG Wealth Advisors in 2007 where she manages the Charlotte Wealth Management practice and serves on the firm's leadership team.

Sarah, welcome to DHG GrowthCast.

[00:01:56] SC: Thank you, John.

[00:01:58] JL: Well, when I think about succession planning and owners exiting businesses, I think a lot about things like transition leadership, the value of the company, and how much it can be so foreign. Who out there might be a buyer? Am I not necessarily thinking about financial planning and why it is so important?

[00:02:19] SC: Well, John, very simply, financial planning is the road map, and having a plan can help you determine if your goals for transition are realistic. You wouldn't get in the car and drive from North Carolina to California without a map or a GPS, would you?

[00:02:37] JL: No, I don't think so. No.

[00:02:39] SC: Why would you head into a 30-year or 40-year retirement or maybe even longer without having a clear financial path to get there and having confidence that the funds you receive for the exit of your business are enough to sustain through your lifetime and meet your goals? Let's look at a hypothetical. John, imagine you're a business owner and you plant to sell your business at the age of 55 for a net gain of five million dollars. Now, that sounds pretty good, right?

[00:03:07] JL: Yeah, it sounds great.

[00:03:09] SC: Yeah. You're walking away with five million at 55. Hey, after years of a lot of hard work and putting all of your time and energy into your business, you have some pretty big plans for what the next chapter looks like, right? Maybe it involves some travels, some golfing, some philanthropy, perhaps a second home. You sit down with your advisor and you write down all the things you plan to spend on, and it turns out you have an annual budget of $400,000 a year. That's what you plan to spend. Do you think you're going to make it? Or do you think you're going to need to go back to work at some point down the road?

[00:03:44] JL: Yes. No. Well, I guess I don't know.

[00:03:49] SC: Well, as it turns out, your plan is most likely not going to successfully meet your needs. For one reason, $400,000 is 8% of five million. We talk about a recommended safe withdrawal rate, which is how much you can spend each year from your portfolio without worrying about it running out of money over time. That safe withdrawal rate is more like 3 to 4.5%.

Also, we have to think about inflation, right? Things are going to most likely be more expensive tomorrow than they are today, which means your $400,000 in annual spending will eventually grow to become maybe 500,000 per year or more and add in unexpected expenses in retirement, including growing healthcare cost. You can see why five million dollars is probably not enough to support the desired lifestyle. Having financial planning discussion early on with your financial advisor helps you determine what you need from the sale of your business in order to have enough money to sustain throughout your suspected lifetime. As I said, provide that roadmap for how you need to grow your business to ready it for sale to meet your post-transition goals and need.

[00:05:09] JL: Well, that's really interesting. I guess I hadn't thought about like that. Just switching gears a little bit, what are some of the challenges sellers face once they exit?

[00:05:20] SC: John, that's a great question. In my experience, there are three big challenges out there. The first is managing cash flow. Many business owners are used to having a lot of money in the business but not necessarily having a lot of cash in the bank. Once they sell, that usually changes. Managing that cash flow is critical, especially if you don't have a clear sense of your budget. I've worked with sellers before whose budget just kept changing because they realize how many basic living expenses are being paid for by their company, and all that goes away when you sell. It's really critical to have an accurate budget to keep yourself accountable. Again, one of our goals as financial advisors is to help prioritize spending needs which might include an annual living fund that pays off, gives to charity or investments back into portfolio.

The second challenge I see is avoiding sudden wealth syndrome. John, yes, that is an actual psychological condition.

[00:06:23] JL: Well, that's a new term. What is sudden wealth syndrome?

[00:06:27] SC: Well, it's what it sounds like. It's a distress that afflicts individuals who suddenly come into large sums of money. It could be an inheritance, a divorce. You see it with lottery winners. As I just said, selling a business can take an individual from having a lot of money in the business but not a lot of money in the bank to having a lot of money in the bank, which puts business owners at risk of developing sudden wealth syndrome.

When someone suddenly becomes wealthy, they can feel extreme pressure around their newfound wealth, and this can cause high levels of stress. In addition, when someone abruptly comes into large sums of money, they can feel isolated from a former friend because of disparity in wealth levels. They can feel guilty over their good fortune. They can develop paranoia around losing their money. Or on the flip side, the shock of their new fortune could lead them to make poor decisions around risky investments or overspending. The best way to avoid sudden wealth syndrome in my opinion is to ensure that you have the right team in place, including a financial advisor who's going to provide financial clarity and peace of mind.

[00:07:42] JL: Well, that is fascinating. I can actually relate. I've met a few people in my lifetime who have had some incredible wealth, and you could tell that they've been uneasy in some discussions when it comes to just talking about their wealth and become a little bit guarded, and it affects some of the relationships. I get it. I think that's a real syndrome. I mean, I think it's a psychological issue that people really need to deal with. You talked about a third challenge. What might that be?

[00:08:17] SC: The third challenge is really making sure that you address any specific family needs. What I mean but that, part of financial planning is anticipating how transitioning is going to affect family finances in both the short-term and long-term. Will a family member take the successor role? That might affect the liquidity that comes to the seller after transition. Or can family members receiving any of the liquidity properly handle the wealth? Does the family plan to make philanthropy a priority? Finding answers to questions like these is an important first step in planning which then makes it easier to develop the right plan to take action and avoid surprise in the future.

[00:09:05] JL: You knew this question is coming because of what's going on in our world today. Do you believe that the current market environment creates an additional challenge? I've got to believe that it really makes it incredibly complex.

[00:09:19] SC: Yes. I do believe that, John. Given the extreme market volatility that we saw back in March and the fact that we're still technically in a down market for the first time in over 11 years, naturally a lot of people are nervous about investing. Add in uncertainty around the economic recovery and what that looks like and how long it takes. Many people are asking. Is this a good time to put money in the market?

For someone who is selling a business or thinking about selling a business and wondering what to do with the cash proceeds from the sale, I would say, look, investing is a long-term proposition. Well, this is rather simple. I always remind people that markets go up more than they go down, and they give back more than they take away. Now, I know several of my DHGWA colleagues have appeared on this podcast and spoken to this point in much greater detail, so I would certainly encourage listeners who are concerned about investing in the market these days to listen to those earlier episodes for some good perspective and wisdom.

[00:10:29] JL: Yeah, we did get a lot of good information earlier, and I would echo that there's some real wisdom in a few of those podcasts. Let's – As we move towards closure here, what would be one piece of advice you would give to a business owner listening to today's podcast?

[00:10:48] SC: John, can I be an overachiever and offer up too?

[00:10:51] JL: Sure. Why not?

[00:10:56] SC: There is a well-known Chinese proverb which says, "The best time to plant a tree was 20 years ago. The second best time is now." I love that proverb because I think it really just captures this whole conversation so perfectly. If you haven't done any financial planning, don't worry. It's not too late. Now is a great time to meet with your team of advisors to start discussing an eventual exit from your business along with challenges or complexities that could keep you from meeting your goals. That way, when the time for transition does arrive, you will have better financial clarity and be more prepared to tackle the next stage of your finances in the ways that you desire.

[00:11:42] JL: And the second.

[00:11:45] SC: I know we were really talking about importance of financial planning when it comes to succession. But there's an emotional component to transmission that I think is really important to address. Years ago, retirement was a fairly clear path. You worked hard for 30 or 40 years. You you're your job. You relax. Maybe you played golf. You possibly had a pension which kept concerns about money to a minimum. Retirement was straightforward. It was simple and it looked the same for a lot of people.

But over the last decade or two, the idea of retirement has I believe evolved. I had one client tell me after he retired, he realized he wasn't ready to stop working. He was simply ready to stop the job he had, so he's technically retired but actually back at work part-time for now. I think everyone, not just business owners, needs to have a vision for that next chapter. What will you do if you're not working or running your company? How are you going to fill your time and what's going to give you a sense of purpose and value. Do you have hobbies and interests that will fill your day? Will you travel once we can go back to traveling safely? Will you help with grandkids? We spend a lot of time focusing on being financially prepared for retirement, and that is so, so, so important. But I really believe that being mentally and emotionally prepared is equally as important.

[00:13:11] JL: That is incredible advice and I think the longer that I am around people watching them retire, so many people not prepared, haven't really thought about it. When you ask them what they're going to do, their first reaction is, "Well, I'm going to figure that the next 30 to 60 days." Probably what they should be doing. Two to three years prior is when they should've been figuring that out, at least from a financial standpoint, right?

[00:13:37] SC: Absolutely from a financial standpoint. The more time you – The longer the runway you give yourself, I think the better prepared you will be.

[00:13:47] JL: Well, and again, I don't think we can reinforce enough the safety that there is in talking to your financial advisor about what's going on today and how that relates to the future and planning for your business and just getting some peace of mind around what our are next steps. What I really love is what you said is if you haven't done it, it's not too late because most people beat themselves up over the fact, "Well, I should've done that." Well, guess what? You still have time, and I think those words of encouragement really ring and hopefully will excite people about, "Hey, let's go do this thing."

Sarah, thanks for taking time today to share your perspective and great advice to business owners who were thinking about the next phase of their life.

[00:14:35] SC: Thanks for having me, John. It was realty a pleasure. I enjoyed it.

End of Interview

[00:14:39] JL: Well, you've been listening to DHG's GrowthCast with Sarah Charles with DHG Wealth Advisors. We hope that you've learned some strategies and are thinking differently now if you're a business owner about what the next stage of your business life will be after you sell your business and enjoy the next phase of life.

I'm John Locke, you host, and I look forward to reconnecting with you again soon on the next episode of DHG GrowthCast.

[00:15:05] ANNOUNCER: The content in this podcast is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The opinions expressed in this podcast are those of the participants only and do not necessarily represent the views of DHG Wealth Advisors. The services, securities, and financial instruments described in this podcast may not be available to or suitable for you, and not all strategies are appropriate at all times. Any investments mentioned on this podcast may lose money. DHG Wealth Advisors makes no guarantee that you will profit from any investment or strategy described in this podcast. Information in this podcasts is believed to be accurate and reliable as of the time the podcast, and it may become inaccurate or outdated with the passage of time. Past results are not an indication of future performance. You should contact your financial advisor before making any investment decision.

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