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:
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 (opens in new tab) 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.
Chris Creed is a Senior Lead Adviser for Venturi Wealth Management (opens in new tab). Chris partners with new clients to organize, plan and manage all aspects of their family's financial life. As a Certified Financial Planner® professional and a Certified Private Wealth Advisor®, Chris creates customized wealth planning strategies unique to highly affluent clients.
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