Much has been written about the need for selling shareholders and business owners to undertake both basic and advanced wealth planning prior to the sale of their company. But what many business owners truly need, once they have a letter of intent or a pathway to a definitive agreement in hand, are prescriptive action points to guide them leading up to the closing, and the time period immediately thereafter.
Outlined below are some key considerations for sellers to ensure that personal wealth planning doesn't take a backseat to their business transaction.
1. Hire a conflict-free adviser — a financial quarterback — to coordinate and execute integrated personal wealth planning on your behalf.
As a business owner, your attention will likely be focused principally upon getting the deal … and rightfully so. The right adviser can help you focus upon the issues a surrounding the transaction and its direct impact upon your personal wealth.
Seek an independent, experienced advisor who can advise you personally and partner well with you and all of your other personal advisers: your tax adviser, your estate attorney, your corporate legal counsel, your company chief financial officer, etc. You need a personal “deal team” that is separate and distinct from your company “deal team.”
Avoid advisers who “tell” you what to do as opposed to educating, providing alternatives and allowing you to “choose” what you would like to do.
Look for advisers who work primarily with clients like you; i.e., individuals and families who have similar wealth, similar family situations and similar assets. There is no such thing as “one size fits all” in terms of selecting an adviser. Those who specialize in working with clients like you are likely to have significant knowledge of what will work in your situation.
2.Identify a safe placeholder for your initial liquidity with an independent custodian that is financially sound, secure, and that has the requisite trading, operational and technology platform to serve individuals and families of material wealth.
This action item answers some of the most common questions:
“Where will I send my sales proceeds?”
“How will I park and deploy my initial capital in a safe, secure location?”
“What are the appropriate underlying investment vehicles to use in parking my new liquidity?”
Why an independent custodian? It won't constantly seek to sell you solutions during this critical transition period from company owner to wealth owner, as you will effectively separate the institution generally holding your assets from the underlying investment managers that will be managing those assets.
3. Conduct a capital sufficiency analysis to assess how your overall capital profile will change and implement the appropriate tax, legal and other planning structures that will be necessary immediately after the sale.
Prioritize your needs and run various scenarios using reasonable assumptions of investment returns and taxation to determine what you will have available (after tax) to spend each year for the rest of your life (core capital) and not run out of money.
Core capital — what do I need and want?
• Lifestyle spending. The base critical mass of capital you will need to sustain lifestyle over life expectancy.
• Capital purchases. Those assets reserved for planned capital purchases: homes, cars, boats and the like, coupled with their estimated carrying costs.
• Reserves. The extra asset reserve you should maintain, no matter how wealthy, to provide further assurance that you won't need to sell assets at an inopportune time.
Excess capital equals total capital minus core capital. Once you have positioned your assets to meet your core capital wants and needs, then you should be in a position to pursue strategies to remove excess capital from your estate confidently.
All individuals have their own viewpoints, values and goals in terms of how much and to whom they might transfer their excess wealth (family, charities, others). The critical value in undertaking this exercise is confidence and command of your financial situation.
4. Liquid wealth following the sale of a company brings new complexity and risk and often necessitates a completely new legal, tax and financial operating structure for the management of your personal wealth.
Seek to understand your new financial and risk profile immediately after the sale.
Key considerations are: asset protection, anonymity, and a clear separation of business assets and operations from personal ones.
Ensure that you have considered, and, if appropriate, established the following entities and procedures:
• An entity to hold your initial sales proceeds
• An entity to hold your personal real estate
• An optimal entity and tax structure for facilitating the payment of domestic employees and family office staff, if any
• An entity to hold any retained corporate assets and employees that might exist after the sale
• Vendor arrangements to facilitate continued compensation and benefits for retained employees, domestic staff, etc.
• An entity to hold any personal aircraft, autos, etc.
The list above is NOT exhaustive. In short, manage your personal wealth just like a business.
5. Be sure all of your personal wealth planning strategies are buttoned up and executed.
Depending upon your situation, you may still have time to give/transfer ownership to your children at a discount to the ultimate selling price of your company. There also may still may be time to transfer ownership to charitable entities. It may be appropriate to make outright or deferred gifts (charitable remainder or charitable lead trusts) to charities.
You can also consider creating a family limited partnership or limited liability company to manage wealth and provide a vehicle for training wealth management to the next generation. And finally, update wills and/or revocable living trusts based on your new financial profile.
By proactively addressing these issues, you can help to assure a successful transition from business owner to wealth owner.
Michael J. Montgomery is a managing director responsible for national client engagement, James R. Cody is a managing director responsible for estate, trust and philanthropy advisory services, and Claudia B. Sangster is a director responsible for philanthropy, estate and trust advisory services. They work at CTC Consulting | Harris myCFO, a multifamily office with offices nationwide.