Liquidity Planning for the Family Business

Melissa Olszak, CFP®, CFA® BY: Melissa Olszak, CFP®, CFA® 07.17.17

3 Key Considerations When Preparing to Sell the Family Business

If you’ve owned and managed a business for any number of years, stepping out of that role and selling the business to a third party can feel like walking into completely new territory, even for the savviest of business owners.

Entering into a liquidity event takes some preparation, not just to get used to the newness of the situation, but to ensure you’re taking the best course of action with your investment.

The Importance of an Exit Strategy

Why is this so important? A recent PricewaterhouseCoopers and Exit Planning Institute survey of former business owners found that 75% of owners regretted the decision a year later based on net proceeds. Because of this possibility, it’s important to begin exploring your exit options early, and to remember it’s not just about financials, but about the long-term impact on you, your family, and your objectives for the wealth you’ve created.

The Decision to Sell the Family Business – Reducing Risk

Whatever your reasons for selling the business, be it a lack of a next generation to operate the business or simply a higher selling value in the current market, how you go about the sale must be done carefully to reduce the risk of regrets.

Where previously you enjoyed a CFO or other professional to manage the wealth from the business, exiting the business causes sudden liquidity that many families do not know how to manage on their own.

Rather than risk missing opportunities prior to the sale (such as wealth transfer and tax savings opportunities) or risk making mistakes after the sale (such as poor investment, cash management and budgeting decisions), there are some specific steps to take to ensure that your liquidity event and future is managed in the most beneficial way for you and your family. You would not want to undermine the wealth generated by the hard work of building the family company.

1. Establish the Right Team of Advisors

When selling your business is on the horizon, one of the key items to do as early as possible is to establish the right team of advisors to help with the transition. This would include a business attorney to help navigate the key business decisions and negotiations, as well as personal advisors–such as a tax specialist, estate specialist, investment advisor, and possibly a family office–to help navigate the key decisions required before, during and after the sale. Establishing advisors helps ensure the wealth generated by your hard work is secured for future generations.

The job of the right team of advisors is to educate you on the various opportunities and decisions, and the trade-offs and outcomes of each. When you are selecting advisors, it’s important to understand whether any of them have any conflicts (i.e. how they are paid) to be sure the advice you are getting is objective and in you and your family’s best interest.

2. Establish an Estate Plan

If you have a sale on the horizon of a family business in which you have a concentrated investment, going through the process of implementing an estate plan will help you focus on, and clarify, your estate objectives–whether they are to support your descendants, give to charities, or a combination. You will also need to determine the best vehicles (trusts, foundations, other) to accomplish your objectives.

If this process is started with ample time before the sale, different wealth transfer opportunities will also be available to save taxes and help structure your estate plan so that it’s more beneficial to you and future generations. This area of planning can be technical and unfamiliar, so it should be started as early as possible to ensure the best results.

3. Learn Cash Management & Investment Management

If you have a large investment in your family business, but historically have not had excess liquidity to invest, selling the business will create a bit of a new world for you and your family–in terms of both having excess cash to spend and excess cash to invest. Planning for the sale in advance allows you to begin considering your investment strategy for the proceeds, and also begin considering what budget and spending can be supported by your investments, particularly if after the sale, you will no longer have a business salary or bonus to cover spending needs. Unfortunately, there are many stories (often with lottery winners), where large inflows of liquidity can lead to overspending and eventual erosion of wealth, so planning for this event in advance is critical.

With all of the steps above, it is important to keep the lines of communication open with your advisors and other family members during the decision-making and business sale process. By applying the same discipline used in owning and operating a successful family business, you should be able to diligently work toward preserving personal wealth before, during and after a sale. Educating yourself throughout the process will help you avoid regret, make better long-term decisions (estate, tax, investment and cash), and will benefit future generations.

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