Huge Liquidity Events – Great News, Right?
This week’s blog topic comes from two unrelated news stories, that just happened to occur at the same time.
The first was seen by the whole world, as Hurricane Harvey hit the Houston area.
The second was more obscure, as a local Montreal family business was sold, for a “considerable sum”.
Liquidity for All!
Something that struck me about this hurricane was that storm damage from the wind was only minor, and the much bigger issue was the rain, causing flooding.
When the wind died down, the initial fear subsided, only to be reignited as the downpour of rain continued for several days.
In somewhat similar fashion, the family who had their big “liquidity event”, selling their business for a reported 10-figure amount, will likely have a two-phased reaction.
At first, once the documents were signed, there was likely relief and perhaps a bit of a dazed feeling, but all was probably pretty positive.
That’s normal, after months or years of work finally culminate in the actual sale.
And Now What?
The second generation of the family had been running the business for the past few decades, and there was some G3 involvement in management.
I don’t know any details about the size of the family or its complexity, but I do know that a sudden, large pile of liquid wealth certainly has the potential to magnify any issues
As I alluded to in Solid Wealth vs. Liquid Wealth, an operating business has a certain “untouchable permanence”, so family owners are more likely to be content with occasional distributions.
But when family wealth appears simply as a dollar sign followed by a long number, it seems so much easier to just carve up into pieces.
Two Possible Scenarios
These situations often unfold in one of two major ways.
Sometimes the family leaders are so focused on trying to consummate the deal, that there’s very little planning or preparation around what’ll happen next.
That can actually be a good thing. There really doesn’t need to be a huge rush to figure out what comes next, and thoughtful decisions are almost always better than rushed ones
Other families, depending on whose advice they’re heeding, will already have a whole slew of structures set up in advance of the liquidity event, and when the deal is signed, the resulting wealth simply gets re-allocated into these different structures and accounts in rather short order.
As much as I like to preach about the importance of planning, this may not be the best way, depending how much the family was involved.
Purpose, Values, Vision
I sure hope that before any irrevocable decisions were made, the family took the time to have a discussion around the purpose of the family’s wealth.
You know, some discussion around the family’s values around the wealth they’ve created, and an initial look forward to what the family’s vision of the future is? Yeah, that can be pretty important.
Destructive Powers
I often talk up the Purposeful Planning Institute and their weekly teleconferences, and this week provided a great quote that happens to fit perfectly.
The call featured one of my favourites. Matt Wesley of Merrill Lynch, and a couple of his colleagues, and it will be the subject of a future blog.
But the quote came from Wesley, who related a story about a patriarch who’d accumulated a large amount of wealth, and his preoccupation for the future.
“I don’t want my kids to destroy the wealth I worked so hard for”, he said. “But I really don’t want the wealth to destroy my kids”.
Greener Grass Syndrome
People living in areas struck by drought may have been jealous of the forecast for Texas and the rain they were expected to receive. “Wow, lucky them, we could sure use some rain around here”.
Likewise, those working in a family business, without access to the liquid wealth they wish they had, may also be jealous of the family that managed its business sale.
Time Will Tell
It remains to be seen if the family handles the windfall of liquid wealth in a productive way, or whether this event will sow the seeds of destruction that is so common for underprepared families.
Be careful what you wish for, you may get more of it than you can handle. And good luck!
