Planning for a liquidity event

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What is a liquidity event?

 

Any time a company converts assets without a clear market value into cash or cash-like assets, that’s called a “liquidity event”. This includes business activities like selling a fraction of ownership shares, merging companies, or going public, and they all have one thing in common: they’ll leave a business flushed with cash. Companies hold liquidity events for a number of reasons, mainly to cash out gains on investments, free up cash to pursue other opportunities, or simply because they were given a sale offer too good to resist.

Planning makes perfect with liquidity events. Ideally, the planning process should start 18-24 months before the event. Some wealth-preservation strategies – specifically related to income and transfer tax – may only be available before the sale and not after. And back at home, managers and founders should take time to prepare families for the life transitions that may follow.

The process of planning

 

Founders should first assemble a team of trusted partners to guide them through the process, including but not limited to a wealth advisor, estate planner, corporate attorney, investment and private bankers, and an accountant. After that, they should review how their ownership stakes are held, and evaluate the potential value of shares.

Establishing or reviewing an estate plan is crucial for defining long-term objectives, which will help when setting plans to reach those targets. Trusts like the Dynasty or Grantor Retained Annuity Trusts (GRAT) are common go-to picks for this stage, as they allow a founder to pass wealth to the future generation in a tax-efficient way – depending on the time horizon, that is. An estate plan may also include other elements like a basic will, outright gifts, life insurance, living trusts, and a power of attorney.

Once that’s sorted, an expert team can get down to work formulating a plan to diversify the founder’s assets. That’ll largely depend on personal attitudes such as market expectations, risk tolerance, investment goals, and constraints, to name a few.

Additional considerations

 

Before selling a business, a founder will need to properly consider what they need to maintain their current lifestyle, and the needs of the future generation when potentially planning for those assets. Market conditions also play a huge part in timing when to liquidate assets. Depending on how involved a family is in the business, a founder will need to plan for the transition of control, and it’s important to consider the acquirer’s future relationship with current employees. Proper planning is necessary for a liquidity event, and it’s essential to have a good team capable of addressing every concern.

KEY TAKEAWAYS:

 

A liquidity event happens when assets without an observable market value are converted to cash or other cash-like assets.

In order to preserve as much wealth generated from the sale as possible, founders should aim to start the planning process 18-24 months before.

The process of planning includes assembling a team of trusted partners, reviewing and valuing ownership stakes, establishing an estate plan, and making a strategic asset allocation plan.

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