Managing Private Company Wealth is a Big Deal
Excerpted from Mercer Capital’s book Unlocking Private Company Wealth.
Wealth management for illiquid assets like in your closely held or family business is a big deal that is ignored by too many business owners. We use the term, “pre-liquid,” to describe this wealth because that’s how you think about it.
Your company is with you today. Someday, perhaps a long time from now, you are going to sell it. Right? Then, you will have liquid wealth. So, today, your wealth is pre-liquid. But there are many things you can do in the interim, between now and an eventual sale, to manage your pre-liquid wealth.
Wealth management principles are well established for liquid assets as we have seen. The picture is quite different when the typical wealth manager encounters pre-liquid assets. Wealth managers simply do not know how to address such illiquid assets. They do not fit into any of the typical investment classes.
Regardless, the management of the illiquid wealth locked into your closely held or family business is a big deal for you, your family, your fellow owners, your employees and, indeed, all of your stakeholders.
Pre-liquid assets either become liquid or facilitate the creation of liquid assets when they are sold (entire businesses or partial sales). Pre-liquid assets generate potentially liquid assets when economic distributions (i.e., distributions net of associated taxes) are made to their owners.
Pre-Liquid Wealth Represents Real Money
We are talking about real money when we discuss pre-liquid assets. Professors Moskowitz and Vissing Jorgensen, writing in the prestigious American Economic Review (September, 2002), suggest that the magnitude of private equity and public equity held by households were similar in magnitude, at least through the 1990s, the period of their study. The article is titled “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?”
The professors found it puzzling that households routinely invest substantial amounts in a single privately held firm with a seemingly far worse risk-return trade-off than investing in liquid wealth. We will incorporate some of the professors’ observations into our discussion of managing private wealth.
As of 1998, the professors estimated the value of private equity held by households in the United States was $5.7 trillion. Inflation adjusted, the number would exceed $8 trillion today. In the book, The $10 Trillion Opportunity, published in 2005, authors Richard Jackim and Peter Christman estimated that private businesses worth some $10 trillion would be sold in the next decade. Similar predictions continue to be made today.
We know two things. First, there is a huge amount of wealth locked into private businesses in America. We also know that the tsunami of business sales predicted by Jackim and Christman has not yet occurred. We had a financial crisis in 2007-2009 that severely reduced transactions involving private companies. We have not yet returned to pre-recession transaction volumes.
An interesting study, “Baby Boomer Business Owners: Will There Be a Mass Sell-Off?,” makes important observations about the age distribution of business ownership (Carey McMann, SME Research, September 2002):
- Well more than half of all businesses in America are owned by baby boomers (currently aged 50 – 67) and the still older silent generation.
- Baby boomers are still starting businesses, with 21% of all startups during 2011 having owners 55-64 years of age.
- 37% of businesses have owners with ages of 55 years or older.
The study concludes that perhaps 20% to 25% of all businesses in America will be sold or otherwise change hands over the next five-to-ten years.