Wealth with Intention: Navigating Opportunity After a Liquidity Event

by Sean Abbott, Adviser & Partner, Koda Capital

The full text of this paper is available below. To download a PDF copy of this paper, click here

Having started the business from nothing, now having sold it, the challenge for me mentally has been having one part of my brain telling me to go and buy a Porsche and another part of my brain telling me I need to protect and grow every cent.

Executive Summary

The total or partial sale of a privately held business – also known as a ‘liquidity event’ – is usually the culmination of years of hard work, considered risk taking, determination and tremendous energy. In many circumstances, the proceeds of the liquidity event may be sufficient to provide long term financial security to not only the business owners and their immediate family but also the next generations.

It is also often a time of powerful emotions, as the result of a lifetime of work changes hands.

Financial security does not always mean financial peace of mind, and it is for this reason that many entrepreneurs seek specialised, independent and dispassionate advice about:

1. How to prepare for a liquidity event including maximising tax efficiency and net after tax proceeds
2. How to sensibly invest, preserve and transfer the wealth which has been realised by the liquidity event
3. When and how to engage the family to form a shared purpose for part of the wealth and minimise the risk of the newfound wealth damaging family relations

Finding and partnering with the right trusted adviser will lay down the foundations of confidence which, in turn, allow the former business owner(s) to pursue their other passions as they enter the next stage of their lives.

The content of this paper is based on interviews conducted with the clients of Koda who have recently sold their businesses, their families and the corporate advisers who have assisted in the sale process.

All interviewees provided insight into the personal, emotional, professional and financial dimensions of the overall journey and we thank everyone we spoke with for their valued contribution. Koda becomes a better advisory firm through our deeper and shared learning with clients.

Key Insights from our Research

The four key insights provided by the entrepreneurs interviewed fell into one the following categories:

Insight 1 – The Major Issues Don’t Change

The key concerns identified:

Insight 2 – The Entrepreneur’s Mindset after the Sale: Investments

The second key insight we gained from our latest round of interviews is that the emotional intensity of the road to liquidity affects the approach as to how entrepreneurs wish to approach their next life stage and, in particular, how they want to manage the wealth created by the liquidity event.

The business owner’s typical journey to liquidity can be illustrated through the time line chart below. This time line, which is certainly not to scale given the build business phase is significantly longer than reflected, provides some insight into the demands associated in successfully selling a business.

The Entrepreneur’s Liquidity Journey

The relevance of this context is that following the sale, a period of reflection needs to begin and a significant mental shift for the entrepreneur needs to occur – from one of ‘how do I make it?’ to one of ‘what do I do with it?’

As explained by one of Australia’s leading mid-market corporate advisors:

“My observation is that after selling the business, founders are tired of taking risk. They have spent their entire life taking an isolated risk, have had the liquidity event which has been euphoric for them and then say, ‘I can’t afford to lose this, let’s grow it but let’s be smart here’.

The entrepreneur has typically built their wealth through a single business which they have controlled. A sale opens new opportunities, including to ‘de-risk’ their wealth (through diversification), personally reset and invest their wealth in a manner which aligns with what is important to them.

Our research reveals that whilst most business owners understand this opportunity, a lack of understanding of what to do next, combined with the challenge of releasing control, often lead to two common adverse outcomes:

• An investment strategy which does not de-risk their position in the way they expected (in other words a portfolio of good ideas rather than a good portfolio).
• A lack of diversification in the investment portfolio.

 

Adverse Outcome #1 – A Portfolio of Good Ideas Rather Than a Good Portfolio

The interviewees all confirmed that personal wealth management and advice is generally new and unknown territory. It was also made clear that for most entrepreneurs, it can be challenging to identify both what good advice looks like and whom to trust. There is often also a significant underestimation of the time it takes to appropriately manage the wealth, and to establish the required new relationships, knowledge and thought processes.

While there can be a natural entrepreneurial instinct to maintain full control and/or avoid fees, the downside of no (or poor) advice, a lack of time and the ‘blind spots’ all humans suffer from, often lead to personal balance sheets featuring the following suboptimal characteristics:

Often the result is what we term a ‘portfolio of good ideas’ rather than ‘a good portfolio’ and this concept is illustrated by the diagram below.

A Portfolio of Good Ideas Rather Than a Good Portfolio

Koda’s experience is that a sensible ‘balance sheet’ allocation – which aligns with the key goals held by a founder- is to develop investment weightings which broadly resemble the diagram below. The key benefit of this approach, in addition to a lower time involvement for the individual, is a more appropriately weighted balance sheet which is exposed to global asset classes. The benefit of this structured approach is a lowering of risk through multiple sources of return while retaining appropriate exposures to investments in an individual’s areas of interest/ strengths/networks.

The ‘Smart Money’ Personal Balance Sheet – After A Liquidity Event

It is a portfolio structure which can also move neatly and equitably to the next generation. Importantly, it additionally provides protection and opportunities from the accelerating pace of digital innovation and other sources of disruption which is occurring in and across most industries.

As explained by one interviewee as to the value of advice:

“There is an instinct to want to be in control but to get the benefit of experienced people, who will do a better job than you, a leap of faith is required. Given we have seen what good (corporate) advice looks like as part of the (sale) transaction, why would you not seek out a good (personal) adviser in the post-transactional world?”

 

Adverse Outcome #2 – The Entrepreneur’s Challenge with Good Diversification

One of the common characteristics we see on an entrepreneur’s personal balance sheet following the sale of their business is a high exposure to both property and cash.

The exposure to real estate is often the result of entrepreneurs acquiring properties over time and on some occasions property being used to house the business. The cash, meanwhile, is generally present by virtue of the business sale. For this reason, the business owner is typically comfortable with these asset classes.

This perceived comfort, however, means business owners often miss out on the real benefit that comes with investment in a truly diversified portfolio.

To illustrate this point, the table overleaf presents the annual percentage returns of many of the major asset classes for the last 30 years.

 

Financial year total returns (%) for the major asset classes

Source: Andex Charts Pty Ltd, June 2024.

Key insights from this data are:

1. From one year to the next the best performing and worst performing asset classes appear to follow an almost random walk;

2. Over the 30-year time period, cash has the lowest instance as the best performing asset class and the highest count as the worst;

3. In any given year, there is a wide divergence between the best and worst performing asset class.

Applying these insights to portfolio management, we conclude:

1. Assets should be put to work. Cash has the lowest average return across all asset classes.

2. Diversification is the only ‘free lunch’ in investing. There is no reliable basis to predict which asset class will perform the best or worst in any one year though there is a logical acceptance that the higher the risk taken, the higher the expected return. The value of advice requires ensuring that returns are proportionate to the risk taken.

3. Portfolio optimisation and good diversification require an investor to hold an exposure to all asset classes. A spread of all asset classes is the academically* proven method (Modern Portfolio Theory) of maximising return and minimising risk.

* Economist Harry Markowitz introduced Modern Portfolio Theory in a 1952 essay, for which he was later awarded a Nobel Prize in economics. (1)

Our research reveals that for many entrepreneurs, the concept of investing in any area that may not be ‘the best performing’ is completely counterintuitive. The entrepreneur has been used to taking large single risks. They have an intolerance of underperformance and are used to running towards assets that are not performing and either fixing them or removing them.

Harnessing the benefits of good diversification require business owners to make a fundamental shifting mindset to accepting that, from a wealth management perspective, good diversification means investing in strategies that deliberately won’t ‘fire’ together at all times. This can be a difficult mind shift, but diversification is unarguably the right approach from a personal wealth management perspective – and the role of the trusted adviser cannot be overestimated in helping with the process of shifting to the correct mindset.

Insight 3 – The Entrepreneur’s Mindset after the Sale: Generation I to Generation II

The third key insight we gained from our latest round of interviews is that the impact of wealth on future generations is a material concern for business owners. Many of the business owners we interviewed could cite familiar examples of family breakdown following a liquidity event and most articulated a vision for the future where the family “stayed together” and were bound by a shared set of values. However, most indicated a general lack of understanding on how to make this happen while keeping the family aligned around shared values and family vision.

As explained by a veteran family leadership adviser:

Most families like each other. Generally, the fracture occurs due to misunderstandings following a lack of communication which can spiral out of control and lead to disharmony. Situations like this can be permanent and yet they are avoidable

Sadly, the root cause of family relationships breaking down is a failure to communicate and agree what the plan is from one generation to the next. If ‘Generation I’ is not communicating the 20-year plan, ‘Generation II’ will start second guessing and a splintering of relationships can follow.

We often observe breakdowns in communication that can lead to damaged family relationships. Money is a sensitive issue. Well-intentioned parents are often reluctant to discuss the wealth – aware of the saying “the first generation makes it, the second generation spends it, and the third generation blows it”. Often the problem with this approach is that in the absence of any communication, inaccurate conclusions are often inferred from parents’ behaviour and a meaningful disconnect occurs. Communication is critical to avoid this.

Koda’s suggested approach: Meet, talk, explain the situation and the broad plan. Seek each family member’s thoughts and input.

Generation I should run a structured, objective process to have Generation II informed and engaged with the family strategy:

For example if the family decides to allocate a portion of their investable capital to forming a charitable foundation, we have seen significant benefits of having the children get involved with the family’s foundation. Generation II should meet with investment advisers, learn about risk, return, tax, cash flows and measuring outcomes. They should be taught how to form a policy to professionally ward off well-meaning friends seeking the family’s financial contribution to causes or business ‘opportunities’.

As time goes on responsibilities can be increased as expertise and financial maturity builds, as illustrated below.

We see this approach as far more beneficial than the common annual cash allocation, with minimal communication and involvement. Family Leadership is one of Koda’s four service pillars.

 

Insight 4 – Financial Security Does Not Always Mean Peace of Mind

The sale for the (often times exhausted) entrepreneur will generally mean navigating a large shift from the very familiar and comfortable position of running their own business to the unfamiliar and uncomfortable position of considering how to manage the proceeds, steward their family and, at the same time, consider a future without the most significant influence on their past.

Our interviews revealed this is a source of significant anxiety and stress. The lack of clarity on what steps to take next, the lack of awareness of where to find trusted advice and support, combined with an entrepreneurial mindset that doing nothing is not an option leads to the insight that financial security does not always mean peace of mind.

 

Koda’s Wealth Management Approach

Our key beliefs, process and outcomes to date.

Our Beliefs Drive Our Process

With the three key research findings listed at top of mind, the following section is a brief overview of how Koda manages our clients’ financial affairs and how we execute on our philosophy:

 

1. Start with the right business model: The Koda business model is clean and simple – our clients come first. As an independent firm, we do not manufacture investment products and we are unconstrained in the investment universe we can access, which means we provide the full range of wealth advice, free of conflicts and uniquely tailored to each client’s needs. Put simply, we are entirely focused on and paid purely to advise clients.

2. Grow Wealth Gradually – Patient Capital: Academic and statistical evidence confirms that the key to growing wealth is to target consistent returns by compounding gradual positive gains and seeking to avoid periodic large draw-downs.

3. Data is Key – Our starting point is spending a diproportionate amount of time understanding our clients’ needs, goals and preferences, as well as researching all investment asset classes. At our core, data & insight, not gut, drive our recommendations.

4. Upside Vs Downside – Our view is that long-term wealth creation and capital preservation is best achieved by targeting portfolio participation in 80% of market upside in exchange for less than 50% of the market downside.

 

Our Process

Koda Client Portfolio Outcomes

Performance from Jan 2015 to Mar 2025

Since inception from January 2015 to March 2025 (+10 years), the Koda Growth Portfolio has achieved an 8.8% annualised return while the Morningstar Growth Benchmark has delivered a 5.9% annualised return. That is an average outperformance of 2.9% year-on-year since inception.

The Koda Growth Portfolio holds ~70% in growth assets and ~30% in defensive assets, while the Morningstar Growth Benchmark captures the average return across ~200 diversified, actively managed portfolios with a similar asset mix.

 

Conclusion

By continuing to invest the time it takes to understand what is important to our clients following the sale of their business, we are consistently refining our adviceand improving on our abilityto deliver on what is important to each client’s unique situation.

The latest round of founder interviews confirms that great advice results in:

1. Clarifying the Issues – Clarifying the key issues that need to be adequately considered given the range of options available. A founder, having been so focused on building their business, will generally not know what issues need to be considered from a private wealth management perspective. They simply don’t know what they don’t know. Accordingly, good advice will succinctly lay out the issues that need to be considered both immediately and for the longer term.

2. Investing Wisely – Following years of first building the value of the business and then completing the sale transaction, the focus from a wealth management perspective very much becomes one of ensuring the wealth is put to good use and is underpinned by a suitably conservative approach.

“As entrepreneurs, we have always felt we were always only ever two phone calls from oblivion so the fear of losing what we have built plays heavily on me…Protecting and growing what we have made, and passing what we can to the next generation, means a lot to us”.

The sale of a business means Koda clients have created their initial wealth. Data conclusively shows that avoiding large negative losses and growing wealth gradually is the most effective approach in growing wealth. Our investment process is first and foremost focused on protecting and growing wealth while avoiding unrewarded risk.

We understand entrepreneurs will and should continue to be involved in other businesses or personal investments. These areas can include investing in start-up businesses, venture capital opportunities or commencing new businesses which, if unsuccessful, should not compromise the core family wealth and therefore the family’s ongoing standard of living.

The key value in Koda’s role is not targeting returns similar to the founder’s (often leveraged) operating business returns, but rather the provision of discipline to keep to the agreed framework, to only take as much risk as is required to meet required return objectives and to keep a client’s financial house in order.

As stated by Mr. Robert Kiyosaki, author of ‘Rich Dad Poor Dad’, at Koda we understand:

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”.

 

3. An Informed and Engaged Family – The communication from Generation I to Generation II regarding the family’s financial position, if not handled well, is where relationships can fray. Ironically, it is often the wellbeing of the family that is a primary motivator of entrepreneurs when building their business and the liquidity event that crystallises family tensions. As outlined in this paper the engagement, education and involvement of all family members, at the appropriate time, will help bind the family with a shared purpose for the family wealth. The willingness of Generation I to communicate the 20-year plan, is generally far more highly valued by family than a ‘please ask no questions’ annual cash gift or distribution.

Koda’s Commitment to Clients

Appointing a firm to take on the role of managing a family’s wealth can understandably be a difficult decision for the entrepreneur. Trust is critical and precedes the requirement to prove capability. One of the key foundations Koda has put in place is a fiercely independent partnership model, unaligned to any financial institution or product ‘manufacturer’, meaning the firm’s sole revenue is fees for advice. This structure eliminates the potential for any potential conflicts of interest. Koda’s commitment to clients is very clear.

Our commitment to clients highlights what we stand for as a business and ensures we deliver on our promise of Koda’s name – being our client’s ‘friend or ally’. Our independence is core to our promise to our clients, to the profession, and to ourselves.

General Advice Warning: Any views expressed in this email have been prepared without considering your objectives, financial situation or needs. Before acting on any advice in this document, Koda Capital Pty Ltd recommends that you consider whether this is appropriate for your circumstances.