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Published on: 12/03/2022 • 7 min read

How To Plan For A Liquidity Event

A liquidity event is a situation in which a company or individual has to sell an asset, is acquired by another company, or goes public in order to generate cash. These can happen for a number of reasons, such as needing to pay off debts, investing in new opportunities, or simply because the owner wants to cash out.

No matter the reason, preparing for a liquidity event is a vital part of financial planning for business owners. You’ll need to be aware of your options, valuate your equity, get your paperwork in order, and determine your objectives for the sale. Here’s everything you need to know about liquidity event planning for business owners.

What is a liquidity event?

A liquidity event is when a company or individual converts a portion of or all of their ownership shares into cash or liquid securities. This can happen for a number of reasons but is commonly triggered when a shareholder seeks to exit their investment due to circumstances like retirement, estate planning, or divorce.

Other liquidity event examples include the need to raise capital to invest in new opportunities, pay off debts, or simply because the owner wants to cash out. In some cases, a liquidity event may be involuntary, such as when a company is acquired by another company or goes public through an initial public offering (IPO).

There are four main types of liquidity events:

  1. Public Offerings: An initial public offering (IPO) is when a company sells shares of stock to the public for the first time. This is one way to generate cash to reinvest in the business or pay off debts.
  2. Private Sales: A private sale is when a company or individual sells an asset, such as property, art, or a business, to another party in a private transaction. This is often done to raise capital or liquidate assets.
  3. Spin-offs: A spin-off is when a company splits off a part of its business into a separate entity. This new entity can then be sold to the public or to another company. This is often done to raise capital or focus on a specific business line.
  4. Mergers and Acquisitions (M&A): An M&A is when two companies combine to form a new company. This can happen through a merger, where both companies equally contribute their assets to the new company, or an acquisition, where one company buys out the other. These transactions are often done to raise capital, expand market share, or reduce costs.

Preparing for a liquidity event can be a complex process, so it’s important to work with a financial advisor who can help with your exit strategy succession planning.

Your guide to planning for a liquidity event

For business owners, it’s important to have a plan in place before you’re in a position to sell your company or assets. This will ensure that you get the best possible price for your equity and can make the most of the opportunity. Here’s a step-by-step guide to help you through the process:

1. Hire a team of trusted wealth advisors

The first step is to put together a team of wealth advisors who have experience in wealth management for executives and business owners. This team should include your accountant, lawyer, and fiduciary financial advisor. They will be able to help you with the valuation of your equity, negotiating the sale price, and structuring the deal in a way that minimizes taxes.

2. Determine your long-term objectives

Before starting the process, it’s important to sit down and determine your long-term objectives. What are your goals for the sale? Are you looking to retire, reinvest in another business, or simply cash out? Once you know your objectives, you can start to put together a plan that will help you achieve them.

3. Valuate your equity

The next step is to valuate your equity. This can be done through a number of methods, but the most common is to use a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). This will give you a good starting point for negotiating the sale price of your company. Alternatively, if your company’s value isn’t where you want it to be before a sale, you may want to consider ways to increase the value, such as through a buyout or taking the company public.

4. Get your paperwork prepared and your financial house in order

One of the most important steps in preparing for a liquidity event is to get your financial house in order. This means reviewing your balance sheet, income statement, and cash flow statement. You should also have a clear understanding of your tax situation and how the sale will impact your personal finances.

For many shareholders, a large sum of their net worth is tied up in their business. Therefore, your estate is another crucial aspect of your financial plan to consider when planning for a liquidity event. You’ll need to have your will and trusts up to date, and you may need to consider life insurance to ensure that your family is taken care of financially if something happens to you. You can also consider setting up an irrevocable trust to help minimize taxes on the sale of your business and safeguard your personal assets.

Continue reading: What assets can go in a trust?

5. Find the right buyer, negotiate the terms, and close the deal

Once you’ve determined your objectives and prepared your financial documents, it’s time to start looking for a buyer. This can be done through a broker, by working with an investment banker, or by selling directly to a strategic buyer.

It’s important to find a buyer who shares your vision for the company and who is willing to pay a fair price for your equity. Once you’ve found the right buyer, it’s time to negotiate the terms of the deal. This is where having a team of experienced advisors can be invaluable, as they will be able to help you navigate the negotiation process and ensure that you get the best possible price for your company.

After the terms have been agreed upon, it’s time to close the deal and sign the paperwork. Once the deal is complete, you’ll receive your payment and will be free to pursue your next venture.

What do you do after a liquidity event?

Once you’ve successfully completed a liquidity event, there are a few things you need to do in order to wrap things up.

Pay taxes

If you’ve sold your business or taken it public, you’ll need to pay taxes on the proceeds. This is something you should discuss with your accountant beforehand so that you can plan for it and minimize the amount of taxes you’ll owe.

Distribute assets

If you have any assets that need to be distributed, such as stock options or restricted stock, you’ll need to do so after the sale. This is typically done through a broker or investment banker.

Update your estate plan

If you have an estate plan in place, you’ll need to update it after the sale of your business. Since  your assets and financial situation will likely have changed, you’ll need to make sure that your family is taken care of should something happen to you.

Invest the proceeds

Once you’ve received your payment from the sale of your business, you’ll need to invest it wisely. This is where having a financial advisor can be helpful, as they can help you figure out how to best use the proceeds from the sale to achieve your financial goals.

Enjoy your new life

After you have taken care of the practicalities, it’s time to enjoy your new life and start planning for your next venture. Whether you’re retired, pursuing a new business opportunity, or investing in real estate, you can use your newfound wealth to continue building the life you’ve worked hard to achieve.

Considering liquifying your business? Contact Avidian Wealth Solutions today.

Planning for a liquidity event is not something you should do on your own. You need experienced advisors to help you navigate the complex process, ensure that you get the best possible price for your company, and verify that your family is taken care of financially throughout the process and beyond.

We are a wealth management firm in Houston that specializes in helping business owners plan for and achieve their financial goals. We can help with everything from business succession planning and estate planning in Houston, to offering advice on how to strategically invest your earnings.

For more information about our financial services, schedule a consultation with us today.

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