This part III of our III-part series in profitable business exits. Part III focuses on what your investment options with the proceeds from the sale of your business. Read Part I by clicking here and Part II by clicking here.
After completing the sale of your business you need to decide what to do with the proceeds.
Whatever the total payout and however the payout is structured, you should have access to a significant amount of capital in the near term. Let’s make sure it’s allocated efficiently.
In our experience, business owners who have just completed the sale of their business have three objectives:
An investment is tax efficient if it reduces the overall taxes owed by the individual or business within legal boundaries.
Produce a steady mix of growth and income
Before, your business provided both regular income and growth. Now that you’ve sold the business, you need something to replace both. You should want to find an asset with a consistent historical track record and a strong probability of maintaining that performance in the future.
Think of the steps you took to insulate your business from external risks. You want to take the same approach here, factoring in what you already own and the external market forces. Inflation, regulatory changes, and other economic variables can contribute to risk.
Let’s discuss some popular investment options and their trade-offs, given the current environment.
What investment options should you consider?
The universe of potential investments is vast. We’ll consider a narrower set of asset classes that are popular choices for significant investment that your proceeds can contribute to.
Stocks and bonds can be a mix of international or domestic securities. You may consider purchasing the individual issues or a fund.
Crypto refers to cryptocurrencies like Bitcoin, Ethereum, or more esoteric decentralized finance options. Non-Fungible Tokens (NFTs) are another type of alternative investment option built off the blockchain, which provides more utility to investors, versus bitcoin which is more to the equivalent of investing in gold.
A new business could mean taking an active role to start a new venture or a passive role in an existing business.
Private equity real estate (PERE) refers to taking a passive role as an investor in a private real estate opportunity.
You could consider stocks or bonds. A portfolio of both assets has historically produced very competitive results. That said, there are growing reasons to consider having a lower percentage of your net worth invested in for the next few years. Inflation, the expected direction of interest rates, and current stock market valuations are three major factors that may dim the outlook for traditional assets.
You’ve no doubt heard all about bitcoin and cryptocurrency at this point, potentially NFTs too. Maybe you even own a little bit already. But is it appropriate for the sale proceeds from your business? Cryptocurrency is interesting but still has too many unknowns. It’s purported to be an inflation hedge, but we haven’t had much inflation since it was created in the late 2010s. Plus, the volatility is much higher than stocks, and the regulatory outlook is mixed at best.
A new business could be attractive. Do you have the time, or, more importantly, the will to build another business? Is another business consistent with the wishes of your family? If you’re not ready to leave the small business world just yet, you could invest in a private equity business venture. Even as a passive investor, though, there are many ‘unknown unknowns,’ particularly in the start-up world, that contribute risk, not diversify it.
Lastly, you could consider private real estate. PERE is one of the more tax-efficient ways to invest your capital. It features a very positive growth and income outlook. And the scarcity of good real estate means prices historically meet or exceed the general level of inflation. Unless your portfolio is primarily allocated to other real estate investments, investing in real estate could be a prudent way to meet all three objectives.
What to look for in a private equity real estate company?
You may be considering PERE for the first time. If so, welcome. It’s an exciting space that can produce significant upside for you, and depending on the fund type, could be potentially beneficial for overlooked communities across the U.S.
Are you interested in learning more about Qualified Opportunity Zone Funds (QOZFs)? The material benefit is 10-year tax-free growth. However, its “step-up” in basis benefit is set to expire end of the year 12/31/2021. This benefit gives you an additional 10% savings on deferred gains, only if you invest before the deadline.
Here are some characteristics to look for as you evaluate investing the proceeds from the sale of your business in PERE:
Fees: private equity firms typically charge two fees: the management fee (average is 2% on capital) and a performance fee (typically 20% of the gain). Ideally, look for firms with an investor-centric approach to these benchmarks.
Deal flow: success in private real estate depends on the people managing the investments. Make sure they have a track record of successful deals.
Community focus: The big names with national reach need to spend money to get to know a community. Start with a shop that’s already an established member of the community.
Value focus: look for a firm that focuses on fundamentals and seeks value. Buy assets below market value, then add value through renovations, better management, and branding.
As the Wealth Development Company, we are a leading U.S. sponsor with approximately $500 million in assets under development and management. These investments are comprised of alternative investments, which include private funds and syndications, externally managed real estate investment trusts (REITs) as well as public funds. We conduct substantially all business through our Sponsor, CaliberCos Inc., a vertically integrated platform that is strengthened by more than 70 professionals with decades of institutional experience in commercial real estate, capital markets, alternative investments, and mergers and acquisitions.
We allocate our alternative investment strategies and align them with investors’ investment objectives, risk profiles and liquidity preferences to offer an optimal balance of risk-adjusted returns and attractive investment performance. It is because of this thoughtful, intentional approach, and our unwavering pursuit of performance, that we have been deemed The Wealth Development Company.
We strive to build wealth for investors by offering a diverse host of investment solutions that fit our investors’ needs. With a primary focus on key middle-market growth areas, such as Arizona, Colorado, Nevada, Texas, Utah and Alaska, we evaluate other U.S. markets that possess the same attractive demographics and macroeconomic trends as our targeted markets, such as highly skilled labor, emerging population and job growth. In addition, we utilize our institutional full-service operating platform to generate operating efficiencies while enhancing the value of our investments through dedicated asset management strategies.
We create value through a combination of internal and external growth channels. Bringing together the benefits of real estate, deep asset-class, and capital markets expertise across public and private investments. We seed, develop, and manage a broad range of liquid and illiquid alternative strategies for a diverse group of investors who comprise approximately a $4 trillion alternative investment market, which includes high net worth, accredited and qualified investors, as well as family offices and smaller institutions. This strategy allows us to opportunistically compete in an evolving middle-market arena for alternative investments that range between $5 million and $50 million.
Click here to see Caliber’s current property portfolio.
If you would like to speak to someone about diversifying your retirement accounts, contact us at firstname.lastname@example.org or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
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