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  • Writer's pictureDavid J. Perrotto

Approaching a Liquidity Event? What should you ask your Financial Advisor?

Liquidity events, such as a successful IPO, the sale of your company, are often large 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 the fruits of your labor. With an influx of personal wealth, you may suddenly find yourself with true financial independence and a series of new choices. From lifestyle decisions to estate and tax planning, you’ll need to make some far reaching and significant decisions.

Where should you start? Your financial advisor can help put you on the right path 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 advisor has likely worked with many clients in a similar position to yours, knows exactly how you feel, and can help you better anticipate and plan for the personal and financial changes, which will soon befall you. Ask them to break down scenarios of what possibilities your future may hold. What are your lifestyle needs? What does financial independence look like for you? How can you stop life style creep? 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 advisor 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 critical, because it can save you a substantial amount of money, so you may want the benefit of putting some structures in place well before the event. At the time of the liquidity event you’ll have an endless to-do list, so make sure that your tax reduction methods are in order, and this is one of the things on the top of that list.

What are the potential risks I should be considering?

Liquidity events can be extremely complicated and complex, with business decisions taking many unexpected twists. 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. Advisors can offer some 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 advisors 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. Again this could result in substantial tax savings down the line. What did I forget to ask?

A liquidity event will 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 advisor 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.

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