You're a 30-something entrepreneur who has toiled long hours over the last five years with a dedicated group of software engineers, designers and marketing people to create the next mega app.
The advisor at your venture capital firm says an offer to acquire your business (maybe from Google or Yahoo) is likely to come soon and you should start to think about how a transaction will affect your personal wealth, liquidity, tax planning and estate planning.
You ask around for references for someone or a firm to consult about the personal issues surrounding a potential business sale.
Do you seek a lawyer, an accountant, an investment banking firm or an integrated wealth-management firm?
When considering a business sale, a company owner typically faces a daunting intersection of several planning issues related to deal structure decisions, legal and regulatory considerations, income-tax minimization planning, wealth transfer, philanthropic strategies and capital-sufficiency analysis.
Gaining objective advice on all these issues is key to optimizing a seller’s goals and objectives. Yet, once a letter of intent is in hand, many business owners seek counsel to cut through these complexities and gain prescriptive, salient action points to guide them all the way to the closing and for a time afterward. These guideposts can help them chart a course for their personal finances, while concurrently focusing on the transaction at hand.
Below are some key action items for sellers to consider to ensure that their personal-wealth planning doesn't take a backseat to the business sale.
1. Hire a conflict-free financial quarterback.
As a business owner, your attention will likely be focused mainly on getting the deal done. But you will need a personal deal team that's separate and distinct from your company's deal team, including someone to coordinate and execute integrated, personal wealth planning on your behalf.
A financial quarterback can concurrently focus upon the personal-finance issues surrounding the transaction and their direct impact on your wealth. Seek an independent, experienced advisor who can counsel you personally. Ideally this will be someone who will work well with other individuals, such as a tax advisor, an estate attorney, a corporate legal counsel and the company's CFO.
2. Identify a safe placeholder for the initial liquidity.
Common questions encountered by sellers include the following: Where will I send my sales proceeds? How will I park and deploy my initial capital in a safe, secure location? What are the appropriate, underlying investment vehicles to use?
The solution is to find an independent custodian that is financially sound, secure and with the requisite trading, operational, service and technology platform to serve individuals and families with considerable material wealth. An independent custodian will not seek to sell you solutions during this critical transition period from company owner to wealth owner.
This way you can effectively separate the institution holding your assets from the underlying investment managers who manage those assets.
3. Develop a business plan for management of the liquid wealth.
Working with your financial quarterback, develop your new investment business plan (known as an investment policy statement) for the immediate deployment of the transaction's proceeds and for long-term management of investment capital.
Consider undertaking a purpose-based approach that appropriately matches your goals with investment strategies such as these: a short-term strategy (tax reserves, working capital, near-term planned outlays and lifestyle needs), an intermediate-term strategy (new investments) or a long-term (income needs, wealth transfer and philanthropy).
You don’t have to design your entire long-term investment plan at this stage, yet the development of a preliminary plan in advance of closing will provide peace of mind, safety and clarity.
4. Implement necessary tax, legal and other planning structures.
The arrival of liquid wealth following the sale of a company brings complexity and risk. It often requires a completely new legal, tax and financial operating structure for the management of personal wealth. Seek to understand your new financial and risk profile immediately after the sale. Key considerations are asset protection, anonymity and a clear separation of business assets and operations from personal ones.
Working with your financial quarterback, ensure that you've considered and, if appropriate, established the following: an entity to hold initial sales proceeds, an vehicle to hold personal real estate, an optimal entity and tax structure to pay any domestic employees and family office staff, vendor arrangements to facilitate continued compensation and benefits for retained employees and domestic staff, and an entity to hold any personal aircraft and autos.
5. Conduct a 360-degree review.
Prior to closing the business sale transaction, your legal, tax and other advisors should take part in a thorough review of your entire financial situation. Working with your financial quarterback, ensure that all your personal wealth-planning strategies are buttoned up and executed.
Ideally, if you've executed the above steps far enough in advance, there may still be planning opportunities and strategies to pursue prior to the closing. You may still have time to gift or transfer ownership to children (or to a trust for the benefit of future children or other relatives) at a discount to the ultimate selling price of the company.
In addition, you might be able to transfer ownership to charitable entities or a charitable trust to avoid capital gains taxes and provide you with a future income stream.