With Chicago-area startups from Fieldglass Inc. to Trunk Club Inc. making huge exits, many once-penny-pinching founders are facing sudden wealth. But preserving and growing that payday takes as much discipline as getting to it. Ben Leshem knows. As managing director for investments at Deerfield-based Hefter, Leshem, Margolis Capital Management Group of Wells Fargo Advisors LLC, he guides wealthy people and families to manage the fortunes they’ve built and what to do when they have a “liquidity event.” He discusses entrepreneurs, big paydays and common mistakes.
Q. What’s the most important thing to do when you have a “liquidity event” and why?
A. Once a transaction is completed, our advice is to park the funds in a safe place, like government treasuries. Pause. Wait. It’s very easy to be rash and make a mistake. Don’t rush to reinvest the money. Don’t rush to do anything. Take some time to digest the event that just occurred. Two, seek advice from the most seasoned investment advisors, attorneys and CPAs. And once the dust settles, start making decisions on how to reallocate your assets. The reason is simple: Most often, they’re not going to have another liquidity event.
Q. Do serial entrepreneurs have the same needs?
A. Serial entrepreneurs are a completely different breed. They are generally younger, and they are not looking to increase or build their lifestyle. What they’re looking for is the next company. If the first liquidity event was successful, they’ll put money aside and keep a lot of liquidity for the next thing. If it wasn’t, then they have to start the whole thing all over. Their investments tend to be more conservative.
Q. Are there standard guidelines for how to allocate the payday?
A. It really depends on many factors. We ask clients to consider their income requirements. That’s the first question. How much does it cost them to live? That will include their gifting and all the other stuff they’re doing. They may have outside assets to generate income. Once we know that, we can give them an idea of what funds they need to set aside in order to reasonably expect that these funds will generate the income they need.
Q. What’s the most common mistake people make and why?
A. Going out and buying a super-high luxury item the next day. Say you’ve sold your company for $10 million and you go buy a $2 million yacht. That person I guarantee — and I don’t care what their lifestyle is — in five to six to 10 years, they’re going to run out of money. They rushed. Where was the plan? What does the matriarch or patriarch want this money to be for? If it’s a legacy, how much is going to the younger generation? As important is philanthropy. They can make a mistake doing those things also. They can get a call from the dean where they went to school, and they agree to give $10 million to the school upon their death. Maybe they only had $20 million and so there’s nothing left for the family.
Q. What do you do when someone makes that mistake?
A. Sometimes it’s hard to undo. The first thing is to stabilize the financial position. They bought a huge home in Florida, but it’s costing lots of money to maintain plus a golf membership. Put that home on the market immediately, and you might sell it at a loss. But you need to do that.
Q&As are edited for length and clarity.