Spotlight on BDO’s Services: Planning for Liquidity Events

April 2021

There is a massive amount of liquidity in the markets today, as private equity firms, corporations, and other sources of capital are looking to make acquisitions or strategic investments in growing businesses. This has created significant opportunities for wealth generation for many business owners and their families.
 
But opportunities to realize potentially life-changing amounts of money—what financial professionals like to call “liquidity events”—aren’t limited to founders who are looking to sell their businesses or high-ranking corporate executives who can exercise stock options. People may experience a liquidity event if they receive an inheritance or sell a house that has appreciated significantly, for example.  
 
While such windfalls can bring obvious financial benefits, navigating liquidity events can be challenging. The BDO Wealth Advisors team shares its perspectives on the importance of planning for a liquidity event and how BDO works with clients to manage these life-changing situations.
 

Start planning early and build the right team

It is never too early to start planning for a potential liquidity event. Doing so can help you prepare emotionally and financially, as well as capitalize on opportunities to structure the transaction in the most tax-efficient way possible. With the sale of a business, for example, we recommend engaging with your wealth advisor at least 18 months before the transaction. And with any type of asset that is expected to increase significantly in value—whether it is equity in a business or a home—the earlier you start the planning process, the more opportunities exist to transfer those assets and the future expected growth in value to your beneficiaries in a tax-efficient manner. The earlier you begin planning, the better off you and your family are likely to be in the long-term.
 
In most business transactions, such as a sale or a recapitalization, a client is guided by a team of advisors. This team often includes a wealth advisor, accountant, estate planning attorney, valuation advisor, and insurance advisor. Ideally, all of these individuals work as a cohesive team from start to finish, but it is important to designate someone to lead and coordinate the team. That professional should be someone who is focused on your long-term, holistic goals, not just one aspect of the transaction. A wealth advisor’s primary role is to quarterback the process for the client and to bring the various team members in at the right time for the client’s benefit. 
 

Pre-liquidity event planning—key areas to cover

The first step in preparing for a liquidity event is setting your long-term financial goals and identifying your priorities. This comes down to defining how you want to live, give, retire, and take care of loved ones. For many, this means having honest conversations about wealth and what type of financial legacy you want to leave. There is no single template that works for all situations, because everyone has unique circumstances and goals.
 
When it comes to selling a business, it is important to structure the transaction in a way that aligns not only with your financial goals and tax situation, but also with your desired level of involvement in the business after the transaction. If you want to remain involved in operating the business or serving in a consulting capacity, you may be more open to having a higher percentage of the money paid out to you over several years through what is called an “earn out.” But if your plan is to retire immediately, you may want more of the proceeds paid immediately. If the business owns a significant amount of real estate, it may make sense to sell the business but retain ownership of the real estate and lease it to the acquirer.
 
The beauty of starting the planning process early and working with an advisor who understands your priorities is that it gives you the flexibility to shape the transaction in a way that aligns with exactly what you want to accomplish. If you know about the transaction ahead of time, depending on how things are structured, you can use a business transaction to pass large sums of money between generations in a tax-advantaged way. It all depends on each client’s cash flow needs, post-transaction goals, and the tax implications of the transaction.
 

Post-event financial planning

Once a liquidity event has occurred, the focus turns to managing that wealth and making sure it is aligned with your priorities. A wealth advisor can help build a diversified portfolio that accounts for recurring living expenses and large, one-time purchases that arise, as well as earn-outs and any ongoing equity stakes.
 
In addition, reaching a new level of wealth may open new investment opportunities, including access to private asset classes such as private equity and real estate. While these alternative asset classes can offer attractive opportunities for capital appreciation, they are often illiquid, and they require expert due diligence, management, and oversight. This highlights the importance of working with an advisor who has experience in private asset classes.
 

Benefits of working with BDO Wealth Advisors

When planning for a liquidity event, BDO’s clients benefit from the firm’s broad resources as well as the collective expertise of its many team members. In addition to wealth advisory, BDO’s capabilities include tax, valuation, and transaction advisory. BDO’s wealth advisors benefit from the firm’s breadth of expertise as well, as they are able to consult with colleagues who have deep industry knowledge and have worked through a variety of complicated situations with clients.
 
A liquidity event—whether it comes in the form of executing a business sale, receiving an inheritance, or selling highly appreciated real estate—can be a life-changing experience with implications for generations to come. No matter the size of your potential liquidity event, BDO can help you every step of the way. By combining the resources of a global firm with an in-depth knowledge of your unique goals, we can help you design and execute a plan for turning this wealth into a true financial legacy.
 
For more information on how BDO can help you plan for a liquidity event and manage the wealth created by one, contact your BDO wealth advisor today.