Preparing for a Liquidity Event

What is a Liquidity Event?

A liquidity event is a way in which investors or shareholders can convert their investments or shares into cash. This can happen through an initial public offering (IPO), a merger or acquisition (M&A), or a sale of the company to a strategic buyer.

Investors in private companies such as venture capitalists always have future liquidity events in mind, as this is the reason they are in the game – for the hope of receiving a windfall from liquidating shares.

However, many successful business owners have never considered such an event. Usually, founders are so focused on growing their business that they don’t have time to think about potentially cashing in on a sale or going public. For family-owned businesses, a liquidity event is less common, as it is generally expected that family members will work for the company and hence the asset is passed down to the next generation.

If you are considering, or perhaps already waiting to cash out of an investment or business, there is preparation and planning that needs to be done and it requires a team of experts to advise you on different aspects.

How to Prepare for a Liquidity Event

Regardless of whether you are planning a liquidity event or you are waiting for one to complete, there are several things you need to do to prepare:

• Review your company's financials. Investors and buyers will want to see that the company is financially fit and has a strong track record of revenue and/or profitability.
• Develop a marketing strategy. The company will need to market itself to potential investors or buyers. This includes creating a compelling pitch deck and reaching out to potential buyers.
• Assemble a team of advisers. You will need to work with:
  • A wealth manager to plan how the proceeds should be received and used
  • An investment banker who can guide you on the financial structuring of the deal and leverage their network to find potential buyers
  • An accountant to audit your financials and advise on tax-efficient strategies for the sale; and
  • A lawyer to navigate contracts and ensure compliance with regulations.
• Understand the tax implications. The tax implications of a liquidity event can be substantial. It's crucial to consult your accountant to explore tax-efficient structures for the sale and your wealth manager on how to manage the proceeds in a tax-efficient manner. 

In addition to the tax implications that you will need to take into account, such as capital gains taxes and taxes on distributions to shareholders, you need to consider any options open to you to mitigate these.

• Communicating with your employees, transparency is key when discussing the sale of your business with your team, if it is possible to do so. Provide a clear timeline and outline what changes they can expect, such as alterations to their roles or redundancy packages. Addressing these concerns early can mitigate uncertainty and maintain staff morale during the transition.
• Plan for the future. You will need to have a plan for what it will do with the proceeds from the liquidity event. This could include reinvesting into other businesses or assets, paying down debt, or distributing the proceeds to your family.

The Pre-Liquidity Event Process

The pre-liquidity event process can be complex and time-consuming, but broadly, it comprises the following key steps:

1. Valuation: The first step is to have your company valued by an independent adviser. This will give you a sense of the value of your company for when you set a price for the sale.
2. Marketing: Once your company has been valued, you will need to market it to potential buyers. This may involve using the network of an investment banker or broker to help you find buyers.
3. Due diligence: Once potential buyers have expressed interest in your company, they will conduct due diligence. This is a process of reviewing your company’s financial information, operations, and legal documents.
4. Negotiation: Once the due diligence process is complete, negotiations will begin. This is the process of agreeing on the terms of the sale, such as the price, the payment terms, and the conditions of the sale.
5. Closing: Once both parties agree on the terms of the sale, they will start the closing process. This is the transfer of ownership of the company to the buyer. Besides the signing of legal documents, this involves the disbursement of funds and the formal announcement to stakeholders.

The Post-Liquidity Event Process

Once the liquidity event has occurred, you will need to focus on the post-liquidity event process. Primarily, you will need to manage the substantial sum of cash you have generated from the liquidity event. This may mean investing the money, starting a new business, or making charitable donations.

When an individual receives a large injection of cash, it can be quite overwhelming. Beyond lifestyle drift, this is a high-risk time of knowing where to put your money. A wealth manager can play an important part of outlining your new financial goals and planning a route towards them.

It is not all about money. You may be left with more time on your hands, and discovering what lies ahead is an important part of self-discovery. It may be having more time for old hobbies, exploring philanthropy for the first time, or perhaps starting up a new business venture.

Advice for Business Owners

• Start planning early: Starting to plan early for a liquidity event gives you more time to gather financial info, build a team of advisors, and communicate with employees.
• Get professional advice: Experienced advisers can help you sell your company, find buyers, and reduce taxes.
• Be patient: The sale of your company may take some time. Don’t be discouraged if the process takes longer than you expected.
• Communication: Liquidity events can affect a lot of people, some of whom may lose their jobs. Keeping honest and transparent communication is a matter of duty, and this loyalty will be repaid if the deal falls through.
• Hire a wealth manager: Whilst building a team for the liquidity event preparation is important, it’s also beneficial to seek help after the event to help manage the cash from the sale. Whilst these events are often referred to as the “end goal”, life goes on after them, and new financial goals need to be set.

Conclusion

A liquidity event can be a life-changing event for a business owner, but it’s important not to spend your money before you get it. Liquidity events can be long and gruelling, so it’s vital to get the preparation spot on. To do that, hire an experienced team, be rigorous with the financials, and uphold transparency in your communication.

If you are preparing for life after a sale, get in touch with our team who can coach you on your journey and ensure you achieve your financial objectives.

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