Planning for Exits and Other Liquidity Events

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The following is excerpted from chapter 13 of Personal Financial Planning for Executives and Entrepreneurs, by Michael Nathanson et al. That book is available via the Amazon link on this page.

In turn, Abby now realized that her best choice might be to sell her company, leading her to have multiple consultations with attorneys and accountants (and more bills for her and David). It turns out that her now-realized vision of a digital advertising and marketing platform was quite attractive to other companies, some of which might be willing to offer considerable value for Slingshot. Unfortunately, Abby learned that planning for an eventual sale needs to begin well in advance of the sale. She learned, for example, that the after-tax value of her company was artificially lower than she expected because she had incorporated it and had failed to make an important tax election that one accountant called an “S election.” Her mistakes, coupled with the current market conditions, meant that a sale right now might not be the answer to David and Abby’s woes.

A successful entrepreneur can spend decades building and nurturing a business only to have much of its value unnecessarily evaporate because they didn’t plan appropriately for, or properly execute, an eventual liquidity event.[1] That’s a pretty dire statement, and yet, the consequences of not planning for a liquidity event can be far-reaching, creating potential issues with meeting expenses and goals, financial independence, income and estate taxes, achieving peace of mind, and values realization. It follows that pre-liquidity-event planning, as well as eventual execution, must be thoughtful and comprehensive, incorporating each of the Five Pillars of Peace of Mind.

Before getting into the essentials of planning for liquidity events, let’s start by defining what a “liquidity event” might actually mean for an entrepreneur.[2] Most obviously, it could mean a sale of all or a part of the business’s equity or assets in exchange for liquid consideration such as cash, equity in another private business, or marketable securities. The sale of Goliath was a liquidity event, albeit one that occurred under duress.

For a private company like Slingshot, a liquidity event could also include a public offering of its stock through which the owners are paid cash for their shares or acquire the ability to sell their shares in a public market. And it could include a sale of shares to private-equity investors, employees, or family members, with each type of transaction potentially yielding different consequences, valuations, and opportunities.

While this chapter is grounded in practical, technical advice for what to do prior to a transaction, we also want to state at the outset that it’s worth contemplating, and even “visioning,” life after the liquidity event – especially if the event represents an exit from being involved in the business.