This is how entrepreneurs can preserve their personal wealth

Entrepreneurs need to preserve their personal wealth for their own benefit as well as the benefit of their families. They typically devote decades to building up their businesses and companies’ balance sheets, but rarely put the same care and attention into managing and preserving their personal wealth.

“It is important for entrepreneurs to make the mind-shift from generating wealth to also preserving it for themselves and their families,” Nic Horn, director of Citadel and regional head for KwaZulu-Natal, says.

He has four tips to share with entrepreneurs who want to get to a place where they can provide for themselves and their families even if the original source of their wealth is concluded.

Tip 1: Do not tie all your wealth up in your business

Not putting all your eggs in one basket is easier said than done for most entrepreneurs who work tirelessly for decades to create stable and successful businesses. “Many entrepreneurs are motivated to build solid and resilient businesses that can provide the passport to financial freedom, which will allow them to live their hopes, dreams and aspirations.

“It is an investment of personal time and effort that can pay off handsomely. However, if an entrepreneur’s wealth is fully tied to one business or industry, it can be a significant risk when the unthinkable or the unexpected happens. We all remember what happened to many businesses during the Covid-19 pandemic. It is about concentration of risk,” Horn says.

“What you can do is take some of that risk off the table over time. This is counterintuitive for entrepreneurs, because they may reason that they would rather keep the money in their business which builds their wealth, but this is risky. To minimise risk, it is better to transfer some funds to a different pool where it can be diversified and preserved.”

Horn recommends that entrepreneurs get into the habit of extracting some money from their businesses consistently over time and diversify it across different investment classes and jurisdictions for long-term financial security and with the guidance of an experienced and trusted wealth manager.

“This will ensure that no single event can destroy your wealth. We witnessed first-hand how this happened just a few years ago.”

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Tip 2: Build personal financial freedom

For entrepreneurs who worked hard for their success, perhaps without much help over the years, it can be difficult to relinquish full control of their personal finances. “It is a big moment for entrepreneurs when they realise that a qualified expert can make unemotional decisions that will enable them to gain financial freedom away from the business. It is almost like appointing a personal financial director, Horn says.

“What an independent expert can do is firstly to take the emotion out of any investment decisions because emotion is the most dangerous element in investment decision making. What they can then help entrepreneurs achieve is to build a separate wealth pool which is accessible and liquid.

“Liquidity is something that entrepreneurs may not always have. All their wealth is often tied up in their businesses. Liquidity ultimately means having some money tucked away that you can access immediately in times of crisis or as your circumstances change and at no cost.”

Business assets are highly illiquid and subject to risk and therefore cannot always be used as a safety net in a crisis or as a pension in old age. Do not assume that your business can be your pension, Horn warns.

“If you have a heart problem, you go to the best heart specialist, someone with an established track record. It is advisable to do the same with your money if you want to put it in a safe place where the power of compound interest can do its magic at an acceptable level of risk.”

Tip 3: Diversification, diversification, diversification

If you have a business in South Africa, along with your other assets like houses and cars, it means you are almost exclusively exposed to South Africa. Therefore, it makes sense to diversify into other countries and currencies.

“South Africa is less than 1% of the world in global economic terms and therefore it makes no sense to allocate 100% of your wealth here. Offshore markets give you exposure to asset classes and companies you cannot access here as well as, of course, other currencies.”

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Tip 4: Create financial safety for your dependents

Many entrepreneurs have successful businesses, but their children and other dependents do not have financial security because there is no resilient structure around their wealth. Horn says it is as basic as ensuring your will is in place.

“Have you done estate planning? You can destroy what you built and affect the lives of your family and employees if you do not have the right financial structures and processes around them in place, to protect what you built.”

He says if you have a trust, the trust administration must be above reproach. “For example, it is important to hold meetings with accurate minutes. The trustees must make decisions to ensure the trust is not seen as your alter-ego. Your family must know where to access everything and what to do when the time comes, with the assistance of trusted advisors. This is very important for everyone’s financial safety.”

Horn says it is important for entrepreneurs to realise that proper fiduciary structuring can help them as well, as it can enable them to enjoy their own life and retirement, free from financial stress.

“If you keep working into your old age, you should do so because you want to, not because you have to. Plan to put enough money away or be brave enough to let go of your business so that, even if everything goes away tomorrow, you can continue living a quality life into your later years and everything you worked for is kept safe for yourself and your dependents.”