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Family business

From caterpillar to butterfly: Three steps to transition from entrepreneur to investor

Published 18 January 2024 in Family business • 7 min read

The baby boomer generation is leaving the workplace. This raises the inevitable issue of succession for first-generation family business entrepreneurs, says Simon Minder.

Sooner or later, every entrepreneur asks themselves what will happen to the business they have built from scratch. This difficult reflection and decision-making process can often take years. The most important question boils down to whether the next generation is willing and capable of taking on the responsibility of managing the family business. If not, how will the role of the family need to change?

If the family does not want to continue with the business, a full or partial sale, perhaps even an IPO will need to take place. This leads to a shift in the total assets of the family from predominantly illiquid assets – the company and any operationally necessary real estate – to predominantly liquid assets which need to be invested and managed.

As soon as any transaction is completed, entrepreneurs must immediately get used to their new role as investors to protect their financial legacy and, hopefully, create further wealth. Not all entrepreneurs succeed in this metamorphosis, and it involves considerable financial risks. The development of these new assets follows a similar path to the development of a reputation. It’s a long and rocky road – and, just like your reputation, it can be ruined because of one bad decision. From my experience of working with families who have made this transition, new investors must consider the following three steps.

1. Define an investment strategy and plan your liquidity needs

Inevitably, when you sell your company, the news quickly makes the rounds. As a result, there is often no shortage of investment opportunities brought to your attention from a variety of sources.

It might be tempting to jump on the first or most attractive offer from one of these many suitors, but as with your own company, a clear strategy is of vital importance as you begin your journey as an investor. In which areas do you want to invest and what do you want to avoid investing in?

One crucial dimension here is liquidity planning. This consideration often plays a subordinate role for entrepreneurs at the private level, since a flourishing business usually delivers the liquidity needed for the family’s living expenses. This situation changes abruptly after the company is sold.

Liquidity does not normally become a problem due to excessive living costs, but rather due to the new investor making too many investments focused on long-term capital gain. In particular, the balance of direct investments into companies must be managed with discipline. Former entrepreneurs often see in another entrepreneur the same fire as they possessed back in the day and, as a result, they are more inclined to invest in these kinds of opportunities. Far too often, this leads to an imbalanced portfolio that is overly weighted towards entrepreneurial ventures, making it harder to take sufficient care of each investment and posing risks from a liquidity perspective.

If the necessary income fails to materialize to manage short-term liquidity needs, for example, it can trigger an abrupt rethink of current investments to meet those liquidity requirements. This can force an untimely exit from existing investments to meet current financial obligations. In turn, this sudden exit tends to have a negative impact on the valuation of the assets and usually leads to a loss.

stocks market
Liquidity does not normally become a problem due to excessive living costs, but rather due to the new investor making too many investments focused on long-term capital gain

A clear investment strategy according to asset classes and the associated liquidity planning should be established early on, therefore, so that new investors are not forced to sell assets at a loss to generate liquidity.

As interest rates are back and inflation rates have declined, many investors have increased their fixed income allocation to generate steady income and/or implement a strategy with value stocks with high dividend payments. Depending on jurisdictions and wealth structuring, there might be a downside from an income tax perspective (e.g., in Switzerland, capital gains are tax-free), but it is worthwhile to keep the liquidity needs and not only the tax optimization in mind when defining the investment strategy.

Active management can pay out but often you are better off with a passive approach. This applies to funds as well as to wealth managers. Hardly any fund or wealth manager will outperform the benchmark over a longer period. Hence, a core-satellite approach can be a good choice for families to optimize costs and returns. The core would consist of large-cap – mainly value – stocks in the US and Europe with a buy-and-hold strategy whereas the satellite would include ETF with a focus on global small- and mid-cap stocks.

The reference currency of the portfolio – this is usually the currency with the largest spending – is another crucial factor in defining the strategy. For example, Swiss investors may have had a nice performance in USD, but converting the performance in CHF could in some cases even result in negative returns. It is therefore crucial to build this into the strategy.

2. Seek advice from peers and experts

It is highly advisable to use your network to share information with and learn from people who have already been through this tricky metamorphosis. This will enable you to learn from the mistakes, lessons, and successes of others. In addition, you get to draw on their experiences and insights regarding the appropriate choice of service providers – a fundamental consideration in the journey.

As an alternative or additional step, you could seek the support of a consultant or company that specializes in the selection process of investment service providers. If you go down this route, it is important to ensure that such advisors only support you in the selection process and do not promote themselves as a service provider. A classic example of this “double dipping” is the multi-family office – an organization set up to offer services to more than one affluent family that can help with the development of an investment strategy which also takes on an asset management mandate.

Therefore, choose your providers carefully. First, make sure that there is always a segregation of duties. Ensure somebody is helping you with the definition and supervision or is responsible for the execution. There are multi-family offices that focus on definition and supervision, so it is worth considering such setups to have a clear alignment of interests between the provider and yourself. Second, the provider should always explain their staff compensation model. While it is crucial to understand how your provider is paid, it’s even more important to be aware of how your provider is incentivizing its employees. This needs to be aligned with your company goals on both the company and employee level.

Stepping into the world of investing after a successful entrepreneurial life often mirrors the creation of a new strategy, product, or business

There are quite a few consulting firms on the market that will support you in the process of identifying the right providers. Sometimes, your tax advisor can also point you in the right direction.

3. Establish effective monitoring

Once you have defined your investment strategy and engaged the partners necessary to implement it, it’s time to get to work.

Here, it is advisable to create simple but fundamental structures for monitoring – for example, through the formation of an investment committee that meets quarterly. The board should ideally consist of family members and external individuals. The choice of external members should be driven by the family’s investment strategy and experience. In this way, gaps in knowledge and experience can be covered.

During these quarterly meetings, the alignment between strategy and implementation should be reviewed. Risks should be monitored using stress tests and indicators, and adjustments to the strategy should be made if necessary. In addition, liquidity planning should be discussed, determined, and monitored for at least the first 12 months.

Larger extraordinary investments should also be examined. For example, if a family makes a large number of direct investments, it may make sense to form a separate committee to deal exclusively with this aspect. The same applies to donations. Here, a philanthropy committee can help.

The new entrepreneurial adventure: Investing

Stepping into the world of investing after a successful entrepreneurial life often mirrors the creation of a new strategy, product, or business – something very familiar to successful entrepreneurs.

It requires establishing a clear investment strategy with careful liquidity planning as well as seeking advice from trusted people who have already gone through the process or from specialists who can give you independent advice. Your activities should also be monitored by an investment committee selected from the family and a diverse range of external experts.

With this approach and structure, entrepreneurs can make a smooth transition to the role of investor and continue to preserve and create prosperity for generations to come.


Simon Minder

Independent Family Office Advisor at M76 | Family Office Consulting Ltd.

Simon Minder is a seasoned independent family office advisor with more than two decades of expertise in the family office sector. Currently working for seven distinct families, his primary role involves providing support to families and single-family offices where he serves as a vital member of their investment committees. Furthermore, he extends his services by representing families as a dedicated member of the board of directors for their investments. 


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