- Key concerns of business owners post sale
- Common portfolio mistakes that people make
- Have a wealth management plan early on
- Tips for business owners and advisors
- Best solutions vs convenient solutions in portfolio construction
- Examples of niche strategies and money allocation
- Help your clients navigate through the uncertainty
Joanna: Hi, it’s Joanna Oakey here and welcome back to the Deal Room podcast, a podcast brought to you by our commercial legal practice — Aspect Legal.
Today we have on board Michael Massey from Koda Capital to talk all about the topic of managing your wealth before and after a business sale. With a track record of more than two decades of experience as a financial advisor to family offices, high net worth individuals, and institutional clients, Michael offers some great insights on the importance of having a really solid wealth management plan in the context of an M&A transaction.
In this episode, we also discuss the common mistakes that business owners make in this area, and provide some great tips for accountants, advisors and owners of businesses themselves on how to avoid them. So don’t go anywhere, here we go!
Joanna: Hi Michael, thanks a lot for coming on to join us today on the Deal Room.
Michael: Hi Joanna. Great to be here. Thank you.
Joanna: Great. How about we start off at the very beginning. Maybe if you can give us a very quick background of who you are and I guess how you work with businesses.
Michael: Okay, so Koda was founded or started about four years ago by a group of very senior experienced people from the private wealth industry. It really started with a view that it was time for an independent voice in wealth management to emerge in Australia and the market was really crying out for that need, and so the business started.
What we do is we help wealthy families, wealthy individuals manage their wealth, manage their investment portfolios and that is everything from tax advice and structuring, making sure the family understands what the mission for their wealth is and also obviously a really important part is implementing the right types of investment portfolios for those families.
Joanna: Okay, all right. If we’re thinking about the sale environment, what are some of the key concerns that you think these owners of businesses have about wealth after a sale.
Key concerns of business owners post sale
Michael: When an entrepreneur comes to that point where they sell a business, it’s a really big decision. The business has been their baby so to speak. They put a lot of time building it and really put a lot of blood, sweat and tears into making it happen. And then they reach this inflection point for a variety of reasons, it’s time to sell.
It might be time to sell to someone with the capital to take the business to the next level. It might just be a next generational issue and there’s a whole variety of other reasons. But they come to this point and they’ve got a whole lot of concerns.
They go from a situation of being extremely in control, being able to make decisions, pull levers to make the business work, understand the cash flow it’s producing and so on, to a situation where they have a lump of cash and they need to think about how to transition to the next phase. They also have other issues that are aligned to that. How does the family move through this period, through this change together.
Joanna: What do you mean when you say that? What do you mean how will the family work through this together? What are some of the issues?
Michael: Well you have a variety of things. It could be a family member has been very involved in the business. Will their role still exist in the business? Will they need to find something else to do? It could be that other family members haven’t been so involved, and how should they benefit from the transaction?
It comes back to communicating and dealing with uncertainty. If there’s a common theme, probably it’s dealing with uncertainty as you move through a situation that you know and understand extremely well to a new situation that is uncharted territory for a lot of people.
Joanna: I guess we’re talking here about change management for individuals.
Michael: Yeah. It’s not a bad way of thinking about it. It’s almost like a project where a family, it could even be a senior executive approaching a point where “I don’t wanna play that role” in so being corporate. They want to step out. But they’re getting to a point where they need to think about whether they have the right structures in place, what sort of investment portfolio do they need to build, to produce an income and grow the capital steadily over time.
Joanna: And so some of the concerns from a financial perspective I guess then relate to how do we make this pool of wealth that we’ve now liquidated from the sale of our business turn into something that will give us all that we require now into the future from a financial perspective. Is that right? Is that the issues that they’re coming in with, with this fear that this pool of wealth that they’ve now managed to realize will wither away if they don’t take the right steps?
Michael: Absolutely. That’s the number one issue that people deal with and invariably they have either their own bad experience with an investment portfolio outside the business or a friend that had a bad experience.
What we find is that there are a lot of portfolio mistakes people make. One extreme end is they build a portfolio that is almost 100% cash and this isn’t capable of generating the returns that they need either from an income point of view or a long term growth point of view.
Common portfolio mistakes that people make
Joanna: Why are they doing that? I mean you know I guess if you think about it I mean these are very smart people. They’ve built up a business or they’ve grown a business from wherever it was over a period of time. But then stacking all their money in cash, it sounds like maybe they’re just a bit scared of losing it through any form of more aggressive investment than cash. But it looks like a peculiar choice for well-educated people to make.
Michael: Yeah, and I think it comes back to being able to establish the right relationships with people you trust.
Michael: And people that sit alongside you helping you make the right decision. That’s one of the reasons why the Koda business model is quite unique is that we are an independent firm. There’s quite a strict, passive definition of what independence is.
But ultimately, in a nutshell, that means that the fee that Koda charges you is the only fee that we collect so we charge you a transparency for advice. There aren’t hidden trail commissions. There aren’t hidden rebates. If any of those things exist, they get rebated to the client.
We like our clients to understand that the advice we’re giving them is the advice we believe is in their best interest, not because of some other hidden agenda. We don’t manufacture our own product. We go and find the best products that we can find out in the marketplace to solve the investment need of the client. It’s probably no great term but in terms of maybe we could call it solution.
Joanna: Yeah. Okay. So you talked about the mistake of whacking all of their money into cash. What are other common mistakes that these ex business owners are making?
Michael: The other big mistake is the well-intentioned portfolio, if you can call it. What it really is a collection of okay ideas or decent ideas on their own. But the way portfolio is put together, it’s really just a collection of ideas rather than a portfolio with a cohesive plan and you end up with a lot of assets that have quite a high level of correlation and by correlation I mean that the assets behave in the same way at the same time, so you don’t really get the benefit of diversification that you get from a well built portfolio.
Joanna: What’s an example of that Michael?
Michael: The really typical mistake you see is you’ll see a portfolio of ASX top 20 stocks, so by definition it will be quite heavily concentrated in the four major banks. Probably some BHP, some other large cap stocks here. Then for some fixed interest exposure, it will quite often have some hybrids and bank hybrids, which aren’t really fixed interest at all and I think they will need to understand that.
But the big thing there is that you’ve got a group of stocks and fixed interest or cash like instruments that are just very very heavily correlated to the performance of Australian banks, which is very heavily correlated to the performance of Australian property and so you got a portfolio that on the surface, looks quite diversified. But in reality, is actually exposed to a fairly narrow and highly correlated set of risks.
Joanna: Yeah, it’s a good point. It’s a good point. Are there other mistakes that you’re seeing out there? So A) the lack of diversification and I guess B) as you talked about before putting too much in cash, which is a form of lack of diversification I guess. What else are people doing wrong?
My feeling from dealing with many of these exiting owners is quite often that they feel that they’ve got a bit of diversification. They’ve got a bit of property thrown over here. They’ve got a bit of share investment over there. Then a bit of cash in the middle, and they feel that that is giving them diversification. What else are the considerations other than that I guess?
Michael: Probably the other one is maybe the entrepreneur that has done it once and then wants to do it all again and takes too much risk in that second stage or the second act if you like. That could be a mistake.
But the other one is just the planning phase, so not making best use of the different structures that are available for asset protection and tax management. So really before you get to the investment phase, starting at the beginning and saying what are the right structures to use from an asset protection point of view, from a tax point of view but also into generational family point of view.
Joanna: And I guess this is where the subject of trusts comes up. But what do you, what’s some shining examples that you’ve seen of really problematic approaches, mistakes people are making from a structuring perspective when they come in to see you?
Michael: That’s really the area that I’m calling one of my colleagues who’s a specialist in this area and I work with him, with that group to identify those issues. That’s one of the things that we don’t pretend to be as individuals, masters of everything. We’re a team and I call in the guys at work on that aspect to review the client set up and suggest the best way of doing it for me, identifying the issues. But we also work with our clients existing accountants, existing lawyers, all those sorts of people who have played a role and probably continue to play a role in the client’s affairs.
Have a wealth management plan early on
Joanna: Okay. Alright. When should this planning process begin? I mean I’m assuming you’re about to say perhaps before they’ve gotten their cash in their hot little hands, but you tell us.
Michael: No absolutely, I think sooner is always better and in many cases we meet someone many years in advance of them reaching out through the event. It might have an ongoing conversation with really touching base a couple of times a year as things evolve. But sooner is always better and we’re always very happy to build relationships with people planning for things that will happen well down the road.
Joanna: Yeah, absolutely. Okay. And so do you have any tips for our business owners out there or for accountants perhaps who are working with business owners that are considering an exit in the near future? What should they be doing or thinking about from this perspective?
Tips for business owners and advisors
Michael: I think for the business owner, the entrepreneur their first priority really should be on continuing to run their business and maximizing the value of that business and being very focused on that. But also realising that it’s important to establish relationships with people that you can trust.
I’d be saying even if you think this event is a few years down the track for you, there’s no harm in starting to look around and work out who you like and who you can trust to work with because you don’t wanna do that in a rush at the last minute. You don’t want to be distracted from when you get that pressure for finalising your transaction thinking about what do I do next. It would be good if you already have that plan in place and you can really make sure you maximise the opportunity at that crunch point.
For accountants and lawyers, I’d say the same sort of thing. They should be guiding their clients to think a few years ahead and not be in a rush. Same time I’d say it’s always not too late to address some of these issues, even if you passed that liquidity event. Come back and say am I really making the best use of this pool of capital that I’ve got, is this really the best way possibly could be and sometimes just reaching out and asking someone to help you review that is a really sensible idea. I mean, we do that all the time.
Joanna: I guess in tackling this issue early enough it can perhaps also help you drive an understanding of the timing of exit as well. Not that you always have an absolute ability to fully time an exit. But certainly if you know what you’re targeting in terms of the money that you require from an exit, then it can help you in terms of forward planning as to how long it’s gonna take you to grow the business to the point that you gonna get that amount.
Michael: Yeah, I think that’s a good point. And it also means that you can bring the relevant other parties along. If there are maybe some children involved or brothers, other parts of the family involved, or maybe even key employees that you might have incentivised along the way. Get them involved and have them understand what the plan is and that there’s a sort of an educational process there for them, a bit of description that helps to get everyone on the same page and point in the same direction.
Best solutions versus convenient solutions in portfolio construction
Joanna: Yeah absolutely. And I think in our discussions in the past you’ve talked about this concept of best solutions versus convenient solutions. What do you mean by that? Maybe you can talk through that a little bit.
Michael: It comes back to portfolio construction. When we build portfolios for clients and I had this experience again when I met a new client last week, they had their family company bought in the presentation as well and we showed them, we talked about our investment philosophy and how we do things. One of the key pieces of feedback they gave us is that we introduced a lot of investment opportunities that they just haven’t seen anywhere else.
The reason that we can do that is our research team spends a lot of time travelling the globe and thinking about really niche opportunities, making contact with boutique managers and so on and those managers are typically harder to deal with niche asset classes are harder to deal with. But we think it’s a really important part of the value add that we bring to our clients, particularly from the risk-reward point of view with building out the portfolios. So we end up with a much more diversified portfolio for our clients. Now the idea of that is that we can compound their capital at a reeling rate over time regardless of the market cycle.
Joanna: What sort of rates do you go generally target? I presume it changes from client to client, but what’s the general sort of rates you can get the return at?
Michael: It does change a lot from client to client. The really important concept for us is we talk a lot about upside versus downside capture. So in the good markets, we want to capture about two thirds of the good market performance and only about one third of the bad market performance. That’s the ideal scenario for us.
Then what that means is you’re compounding capital at a higher rate over time. If you are achieving in the order of about 10% per annum over a long period of time, that doesn’t mean it will be exactly that number each year. That’s an extremely good return. And particularly, if you already made a substantial amount of capital, that’s extremely somewhere between between 8 and 12, 8% and 12% depending on how much risk you wanna take, is this sort of band people should be thinking for a really strong performing portfolio.
Joanna: And you were saying before in your example of the client that you’re sitting down with last week that there are a couple of things that really surprised them, things that they hadn’t have thought about before and without giving away all of the secret strategies that you guys deliver to only your best clients. What are some examples of strategies that you guys think of that maybe the rest of us wouldn’t have thought of before?
Examples of niche strategies and money allocation
Michael: Well one area that we are seeing really interesting opportunities in years with the capital requirements that banks face now. There is certain parts of lending market have become quite fractured and we’ve seen some really experienced former investment bank executives who ran this strategy around this process inside investment banks step out and set up funds where they raised money for investors to effectively replace the role that the banks used to play in that market.
So they’re doing senior secured lending to. In some cases it might be resource specialist strategy. In other cases it might be an SME specialist strategy. But they’re doing senior secured lending to those sorts of groups and for senior secured lending, they’re getting equity like returns through the cycle. That’s an example of a niche strategy that’s harder for people to access and you’d be working harder to find the managers that build relationships, so that’s great.
Another really good example is equities manager is now very large. We actually originally allocated money to when it was a very small manager. It only had about 50 million under management and usually groups like ours won’t allocate to a small scale manager. But when we understand their process and know the people involved, we’ll do that because we’re backing individuals who do a great job.
That manager performed extremely well over the next several years for a seat at achieving a really good return. But we actually took the money back just recently because they’ve gotten to such a size that we thought their ability to keep generating at a sort of returns is much lower, so much less likely. And that’s at the point where most of the mainstream investment advisors are actually allocating money. It’s quite a different process and I mean it showed really good results with clients over time. That’s one of the things that really impressed this group in particular.
Joanna: Okay great. I guess the message out there for maybe M&A advisors and accountants is just because the transaction is done doesn’t mean your role in advising the clients has finished. Maybe it’s really important to think of providing a bit of a value add in terms of reminding them to think about the what next and planning for what next after the business.
For those advisors out there and accountants, what suggestions do you have for them in terms of identifying where there’s a critical weakness and where they can assist their client by moving them on to someone like yourself that has specific expertise in these areas?
Help your clients navigate through the uncertainty
Michael: Look I think if the advisor senses that there is some reluctance about completing the transaction, then I think if they ask some questions around why, they’ll probably find one of the key reasons is that high level of uncertainty about what the future holds. And that’s where we do really help them navigate that bridge of uncertainty.
I think if advisors are listening to their clients and understanding their motivations, their fears, all those sorts of things. I think if they touch on that, that’s probably where they get someone like us involved to help navigate.
Joanna: Yeah, that’s a really good point. We’ve had a few podcasts on this topic of just being sensitive to and aware of the role of emotions in this process on both sides but particularly so I think often on the side of the vendor or the seller.
Certainly I’ve seen it play out quite a few times before where you have parties digging in. But the real reason they’re digging is not why they say they’re digging in. And they may not even realise the concern that they have that’s really sort of eating at them sometimes subconsciously. So I think it’s a really good point that as advisors we’re thinking about these issues and then able to bring in the right resources to assist our clients in really picturing what life looks like afterwards, assisting them in this individual change management process as you were saying. But helping them get a bit of certainty as well.
Michael: Yeah, I think that’s right. It is a really emotional time for people. And if they had a portfolio, even if they’ve gone through that and they’ve got a portfolio that’s not so great. It can be quite an emotional time acknowledging that the initial plan didn’t work and getting someone else to help them come in and build a more robust portfolio.
Either way, there are issues that push around some pretty strong emotions for people and there’s like any area where you’re out of your comfort, getting some good expert advice is a good idea.
Joanna: Yeah. Awesome. All right. Well look, thank you so much for coming on today to talk to us Michael. If our listeners are interested in making contact with you, how do they go about doing that?
Michael: My email address is [email protected] That’s probably the easiest way to get in touch with me initially. Our website obviously has all those details as well.
Joanna: Yeah, great. Alright and we’ll put a link in our show notes as always. Just in case you’re running along the beach there, half your luck, while you’re listening to this and didn’t get to jot down those details. You’ll be able to find it in our show notes and that will link straight through to Michael.
Well look, thanks Michael, thanks for coming on the show today. I think it’s been a lot of really useful information and a lot of useful considerations to hand over to our advisors to be thinking about over and above just the transaction itself.
Michael: Thanks Jo, I really enjoyed it. Thanks for having me along.
Joanna: That concludes our episode with Michael Massey of Koda Capital on the topic of wealth management before and after a sale. In this episode, we also highlighted some helpful tips for business owners and advisors working in the mergers and acquisitions space. Just as a quick recap, for business owners who are out there considering an exit by selling their business into the future, the top three tips are —
1) plan out ahead of time how you will manage this pool of capital after selling your business;
2) when you start off on the path of planning your exit, prioritise maximising your business value and don’t allow yourself to be distracted; the best way to help yourself focus on running your business well is our third tip;
3) establish relationships with people that you can trust, and get the right advisors to assist you early on.
On the flip side, for accountants and other advisors to businesses considering an exit in the near future, we have two important tips in this area of wealth management —
1) maybe think about guiding your clients to think a few years ahead about how they can best manage the pool of capital they will get from their business sale; you might have to take the initiative here because most business owners won’t understand the importance of having a wealth management plan before going to market (unless of course they’ve listened to this episode too!)
2) even if you are past the liquidity event, it’s never too late to address some of these issues that we discussed in this episode; your role in advising your client shouldn’t end with the transaction; it’s super important that you continue to work with your clients on the “what next” after the business sale, especially if there was no wealth management plan before the sale.
Well, that’s a wrap. I hope you really enjoyed what you heard today. If you did and you haven’t subscribed to The Deal Room podcast yet, then just head over to your Apple podcast or your other favorite podcast player and it hit the subscribe button so that you get notifications straight to your phone whenever a new episode is out.
And if you feel so inclined, we’d be extremely grateful if you’d leave us a review or even throw me a message on Linkedin. I’m always really interested in hearing what our listeners have to say about what you like, what you don’t like. My door is open to chat if at any time you have some clients who are going through this space or you’re indeed a business who’s looking for some legal assistance.
Thanks again for listening in! This has been Joanna Oakey and the Deal Room Podcast, a podcast proudly brought to you by Aspect Legal.
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