Approaching a Liquidity Event? Here's What to Ask Your Financial Planner

Miranda Holmes

Senior Managing Director
Financial Planning at First Republic Investment Management.

September 29, 2015

Liquidity events, such as an IPO or a sale of a company, are often welcome milestones for founders and entrepreneurs. The business typically undergoes significant changes: there could be new sources of cash, and the company could experience an increase in value. But what can change for its founders?

Your own financial situation may change with the fortunes of your business. With an influx of personal wealth, you may suddenly find yourself with financial independence and a series of new choices. From lifestyle decisions to estate and tax planning, youll need to make some important considerations.

Where should you start? Your financial planner can help guide you but you should be prepared to ask them the following questions:

How will this event impact my lifestyle?

Your liquidity event may leave you wondering about the future. Your financial planner has likely worked with many clients in a similar position to yours and can help you better anticipate and plan for personal and financial changes. Ask them to explain scenarios for what the future might hold for you. What are your lifestyle needs? What does financial independence look like for you? Do you expect to continue working? Understand the potential impacts to your personal life.

What should I do to get my tax planning in order?

Liquidity events often result in significant tax consequences, and your financial planner can help you identify potential strategies for minimizing those taxes. You’ll want to understand the tax impact of the event and determine a series of action steps to take that reflect your goals, values, and financial needs.

Asking this question as far in advance as possible is vital, since you may benefit by putting some structures in place well before the event. At the time of the liquidity event youll have an endless to-do list, so make sure that your tax reduction methods are in order.

What are the potential risks I should be considering?

Liquidity events can be complicated, with business decisions taking many unexpected twists and turns. There are many uncertainties to keep in mind, including the possibility of a deal failing to close. There is no insurance against these types of risks, but you’ll need to be aware of them so that you can react and respond appropriately.

Planners can help with analyzing and weighing different potential outcomes and proposing actions that can be taken to address both "best case" and "worst case" scenarios when the outcomes are still unknown.

What steps should I be taking today?

Entrepreneurs should ideally begin planning six months to two years before a potential liquidity event. Often, if the anticipated liquidity event is substantial enough, financial planners may suggest transferring some wealth out of the estate.

It can be highly effective to make wealth transfers at today’s lower values and take advantage of expected increases in value at the future liquidity event.  However, the closer to the event you wait to make these transfers, the more difficult it is to successfully shift the future appreciation out of your estate. It’s never too early to focus on these big-picture considerations.

What did I forget to ask?

A liquidity event will open new doors for you. No matter how much planning and research you do, its tough to know whats on the other side. Your financial planner can help you bridge this gap and bring clarity to what the future might hold. You shouldn’t expect to have all the answers or to even know what questions to ask. In addition to consulting fellow founders, you should feel comfortable reaching out to your financial advisory team. Your team has likely seen your situation before and always has your best interests at heart.<_o3a_p>

©First Republic Investment Management, 2015

The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice.  This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here.  Client’s tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.