Planning for Liquidity Events: Preparing Business Owners for a Transaction
For many business owners, the sale of a company is a once-in-a-lifetime event — the culmination of years, if not decades, of hard work, sacrifice, and risk-taking. But the possible financial windfall that accompanies a liquidity event can also present unexpected challenges. Without thoughtful, proactive planning, significant value can be eroded by taxes, poor investment decisions, or missed opportunities to secure your family's future.
Whether you’re contemplating a sale, merger, recapitalization, or even passing ownership to the next generation, preparation is key. The time to begin planning is before the deal is finalized — sometimes years in advance.
Here are a few critical areas business owners should address to help maximize the benefits of a liquidity event:
1. Tax Planning Before the Sale
Taxes are often the single largest expense associated with a liquidity event. Careful planning can help mitigate the impact. Depending on your situation, strategies may include:
• Gifting shares to family members, trusts, or charities prior to a sale to shift future appreciation out of your estate.
• Establishing a charitable remainder trust (CRT) to defer capital gains taxes and create an income stream.
• Structuring the transaction to qualify for favorable treatment, such as Section 1202 Qualified Small Business Stock (QSBS) exclusion.
• Implementing installment sales or earn-out structures to spread tax liability over multiple years.
The sooner you involve a tax advisor and wealth planner, the more tools you’ll have available to structure the sale advantageously.
2. Building a Post-Sale Investment Plan
A liquidity event transforms illiquid business wealth into investable assets. This requires a fundamental shift in mindset — from building and operating a business to preserving and growing a diversified portfolio. A customized investment plan should align with your new risk profile, cash flow needs, lifestyle goals, and long term vision for your wealth. Key questions to consider include:
• How much liquidity do you need immediately?
• What return is required to sustain your desired lifestyle?
• What level of risk are you comfortable taking now that your income is not business-based?
• How should your investment strategy account for inflation, market volatility, and potential major purchases (such as real estate or philanthropy)?
Importantly, a post-sale plan should be conservative at first. It's wise to "park" proceeds in lower-risk vehicles temporarily until a comprehensive investment strategy is finalized.
3. Estate and Wealth Transfer Planning
A liquidity event is a catalyst to revisit your estate plan. Now that your net worth has materially changed, your current structures may be inadequate or inefficient. High-net-worth families often consider:
• Updating wills and trusts to reflect new assets and beneficiaries.
• Leveraging lifetime exemption amounts for tax-efficient gifting.
• Establishing family governance systems to promote responsible stewardship among the next generation.
• Implementing advanced planning tools such as dynasty trusts, GRATs, and family limited partnerships to minimize estate taxes and maximize generational wealth transfer:
- Dynasty Trust: A long-term trust that preserves wealth across generations while avoiding estate and transfer taxes.
- GRAT: Transfers asset growth to heirs at little or no gift tax cost by paying the grantor an annuity for a set term.
- FLP: Allows assets to be transferred to heirs at discounted values while the senior generation retains control.
4. Assembling Your Professional Team
A successful liquidity event is rarely the work of one advisor. It often requires a coordinated effort between your corporate attorney, CPA, investment banker, financial planner, and estate planning attorney. A cohesive wealth management team should not only help maximize your net proceeds, but also ensure your transition to life after the sale is smooth, confident, and strategic.
Final Thought:
Selling your business is a major milestone — one that deserves the same strategic planning you devoted to building your company. By addressing tax, investment, estate, and planning issues early, you can turn a successful liquidity event into a lasting legacy for yourself and your family.
Preparing for a major liquidity event? Contact our team today to create a strategy that helps you maximize your opportunity at 561-361-8140 or email lew@lawlessedwardswarren.com.
ACKNOWLEDGEMENT: Representatives of AIC/AAS do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Representatives offer products and services using the following business names: Lawless, Edwards & Warren – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services, LLC (AAS) – investment advisory services. AIC and AAS are not affiliated with Lawless, Edwards, & Warren.