America is full of innovators, disrupters and entrepreneurs. The opportunity to start a business has never been greater, and according to the Small Business Administration (SBA), 44% of economic activity is from small business. In fact, much of the wealth we see in the wealth management industry is created from the eventual exit (via sale or IPO) of these businesses. For the average person the sale or IPO of a business may seem like a dream come true, but it does not come without its share of changes and considerations.
Fortunately, there have been many others who have traversed the landscape of business sales. In fact, there are wealth management firms that work specifically with this type of client. Finding a specialist that employs Certified Exit Planning Advisors (CEPA), Certified Private Wealth Advisors (CPWA) and Wealth Strategists is a good start. These financial professionals can help guide you through your post-sale decision-making process.
In my experience, the newly created liquidity from a business sale or IPO comes with the following three questions:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Question #1: How do I maintain my standard of living?
I have traded my income from my business for large infusion of cash. How do I maintain my standard of living while ensuring there are sufficient funds for the rest of my life and possibly future generations? The relief that comes with mapping out your financial future in the form of a financial plan is never more acute than in this situation. Replacing fear and speculation with data is paramount in reducing the anxiety associated with an unknown financial future. From this planning exercise, your practitioner will guide you through identifying, “what it takes for you to keep being you,” from a cash-flow perspective. This will inform the appropriate investment strategy to make sure your goals are attainable and sustainable.
Question #2: What about taxes?
How do I mitigate the potentially enormous tax bill that comes along with realizing a business transaction? This is where the CEPA® and CPWA® practitioners and of course a CPA will come in handy. Every transaction is different as are the tax implications. Is it an asset sale or a stock sale? Is there QSBS (section 1202) stock involved? Is there an earn-out? What happens if I roll my stock into acquiring company stock?
As you can see, this question is multi-faceted and the structure of the deal will play the biggest part in determining the tax implications. For those charitably inclined, there may be some additional options to reduce taxes such as a donor-advised fund or charitable lead trusts, but a thorough plan is required to consider whether these are viable options.
Question #3: What do I need to talk about with my family?
What kind of conversations should I be having with my significant others and our children who now understand the level of wealth created by this sale? On its surface, this may seem like an odd question. However, when you consider that 70% of family wealth does not make it to second generation, and 90% does not make it to the third generation according to Nasdaq, the importance becomes apparent. This is more than an estate planning conversation (here is a good checklist for getting started with that). Think, “the softer side of estate planning.” These family governance conversations include family values discussions and revolve around the vision you have for the legacy you are creating. Having a skilled family governance professional to navigate these conversations is key in engaging the next generations in what could otherwise be an awkward and uncomfortable discussion.
Congratulations on the realization of your hard work into a potentially life-changing business transaction. You have reached an enviable position, and now have the means to shape your destiny. While by no means simple, the reality is that there are professionals who can guide you through this new phase of your life. Engaging these professionals early in the process is always a smart move.
-
I claimed Social Security six months ago at 62, but my checks are too small. What are my options?We asked financial experts for advice.
-
This Is How Much You'll Have to Pay to Share Streaming ServicesIt now costs more to share streaming services with family members who don't live with the account holder. Here's what Netflix, Amazon, Hulu and Disney+ charge.
-
Five Retirement Planning Traps You Can't Afford to Fall Into, From a Wealth AdviserTo help ensure you reach your savings goals and enjoy financial security in your golden years, be aware of these common pitfalls. The key is to be proactive, informed and flexible.
-
Your 401(k) Can Now Include Alternative Assets, But Should It? A Financial Adviser Weighs InMany employer-sponsored plans offer limited investment options, which can stunt growth. But participants considering alternatives might need some sound advice to get the most from their accounts.
-
Will Taxes Shred Your 401(k) or IRA During Your Retirement? It's Very LikelyConventional wisdom dictates that you save in a 401(k) now and pay taxes later, but turning that rule on its head could leave you far better off. A financial planner explains why.
-
More Retirees Are Renting: Should You? A Financial Adviser Weighs InIn some ways, renting is cheaper, more flexible and easier, but unless you understand the implications for your taxes and health costs, it might not be for you.
-
I'm a Real Estate Investing Pro: This 1031 Exchange Strategy Can Triple Your Cash FlowSavvy investors can use 1031 exchanges to unlock value by moving capital across markets in a play called geographic arbitrage. These tax implications can make or break the strategy.
-
I'm an Insurance Pro: Everyone Needs to Prepare for Earthquakes, Even if You Don't Live Near a Fault LineHere are my tips for what to do before, during and after an earthquake. The more prepared you are, the more you'll be able to keep your wits about you if it happens.
-
Where There's a Will, There's a Way Your Assets Will Be Distributed as You WishYour will is the backbone of a strong, adaptable estate plan that ensures what you leave behind goes to your selected beneficiaries. Without a will, state laws determine who gets your assets.
-
I'm a Financial Adviser: This Is What You're Really Losing if You Cut Back on Your 401(k) ContributionsMissing out on the benefits of the employer match and compounding growth could force you to work longer and lower your standard of living in retirement. Here are some alternative options.
