LIDO INSIGHTS | Liquidity Events for Founders | July 2021
By: Dani Comart
Throughout the past year of extraordinary challenges, business owners across industries have been continuing to innovate and grow their companies. As the economy continues to reopen, many founders find themselves in a position to consider the next stage of their personal and professional lives. For some, this may include beginning the journey of an exit strategy and a path towards liquidity to support their lifestyle in retirement. Having the right team of trusted advisors in place early on can make this stressful and emotional time easier and more productive. The pre-transaction planning process requires intent, knowledge, focus, and communication. When combined with strategic estate, tax and financial planning, the result can be significant monetization of sweat equity.
Types of Exit Strategies
The path to liquidity can include Family Succession, Management Buyout, ESOP (Employee Stock Ownership Plan), IPO, Recapitalization, or 3rd Party Sale. Each type of exit comes with different considerations and a range of financial outcomes as well as future involvement for the business owner. In some cases, the next generation may not have the same interest or passion to carry on the mission. Sales to strategic buyers and financial buyers are more common than ever because of low-interest rates and tremendous cash raised by private equity firms that seek growth investments. This demand has resulted in favorable valuations for sellers and has forced buyers to become increasingly creative with the types of companies they purchase.
When selling a business, the focus shifts to closing the deal, which can often take months or even years. Focusing on personal wealth planning well ahead of time can result in significant savings on income, gift, and estate taxes. The process will require time and attention away from day-to-day business operations and should not disrupt customer relationships and employees.
Having worked with many business owners through the lifecycle of an exit, I have often found the most value can be added years ahead of the transaction. This can include basic tasks such as evolving your accounting practices to have “reviewed” and then “audited” financial statements which will give potential buyers more confidence. Most often, the valuation of a business the years prior to a sale will be far less than the eventual sale price. Taking advantage of lower valuations can allow the owner to transfer assets at a lower tax cost. Given the potential changes to income and estate tax law, these are important considerations to consult with your legal and tax counsel.
Post-Transaction: Wealth Management
Having significant liquidity is often an unfamiliar and new chapter for a business owner. A goals-based planning approach will lead to identifying the objectives, needs, risk tolerance of a portfolio. Replacing income and distributions a founder was accustomed to is a significant challenge in today’s lower interest rate environment with the stock market at all-time highs. Having portfolios that can go beyond stocks and bonds can create additional diversification and sources of cash flow for those who it is suitable for. These can include hedging strategies, real estate (debt and equity) and direct private investments.
Choosing an exit strategy or thinking about succession is likely not the first thing on your mind when starting a business. However, planning ahead and learning more about your options is an important part of building a business and securing your financial future.
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