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

Miranda Holmes, Senior Financial Planner, First Republic Private Wealth Management
October 12, 2021

Liquidity events, such as an IPO or a sale of a company, are often welcome milestones for founders and entrepreneurs. While the business typically undergoes significant changes, such as new sources of cash or an increase in value, your own financial situation may change with the fortunes of your business. With an influx of personal wealth, you may suddenly find financial independence with a series of new lifestyle choices available to you, as well as estate planning, or philanthropic opportunities.  These choices also often come with a new level of complexity and potential tax considerations.

Where should you start? Your financial planner can help guide you and model out the following questions:

How will this event impact my lifestyle?

Your liquidity event may leave you wondering about the future. Your financial planner can help you determine your current lifestyle needs and develop scenarios to explore how a change in lifestyle may impact you short-term and long-term. What does financial independence look like for you? Cash Flow planning can help you decide if continuing to work is a ‘need to’ or a ‘want to’ option and 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. Understanding the tax impact of the event as far in advance as possible is vital since putting some structures in place early can potentially help you to minimize taxes. 

As a liquidity event gets closer and closer, your attention will be pulled in many different directions.  Having  your tax reduction methods in order as well as a series of actions steps will help to meet your goals.

What are the potential risks I should be considering?

Liquidity events can be complicated, with business decisions taking unexpected twists and turns, including the possibility of a deal failing to close. There is no insurance against these types of risks, but being aware of them may help you to react and respond more quickly and appropriately.

Your financial planner has worked with many clients in a similar position as yours and can help to identify those risk and 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?

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 may open new doors for you. No matter how much planning and research you do, it’s tough to know what’s on the other side. Your financial planner can help you bridge this gap and help to provide clarity to what the future might hold. You shouldn’t expect to have all the answers or to even know what questions to ask. Your financial planner can be an integral part of pulling together your overall professional advisory team and ensuring everyone is on the same page and working towards your ultimate goal.

 

This article was first published in 2017 and updated in October 2021.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.