What Happens After the Sale? Planning Life After a Liquidity Event
Life After Liquidity
While working within a business, owners live and breathe the business 24/7. Once a business is sold, whether to family, trusted employees, or to an outside third party, life for the owner may change dramatically. The liquidity of a sale may bring financial wealth and security, along with a new task of ensuring that investments are managed prudently and effectively.
A sale event may also create some unexpected emotional uncertainty. The owner may relish having more time to devote to family, hobbies, or other interests, but also experience some challenges in transitioning to a new phase in life that doesn’t involve running a business.
How Do Liquidity Events Affect Taxes?
While the sale of a business can create significant liquidity, a sale may also result in sizable tax ramifications. Business owners need to consider not only the selling price, but what they will retain after taxes. A business sale often results in a federal capital gain on the value above the investment amount, and state taxes may apply.
Factors that may affect the taxation of the business include:
The structure of the business
Whether the sale is a stock or asset sale
Terms of the sale (cash at close, installment note, earn out, etc.)
Planning ahead for a sale a few years before the event can help the business owner to not only save significant taxes, but also to consider preferred sale structures that align with what is important to the owner. Beginning this process early gives the owner time to reflect on what outcomes matter most, and what is negotiable and what is not, without the pressure of the IRS.
Questions that business owners should ask themselves include the following:
Are there family members who have interest in participating in or leading the business after a sale? How do I create equity across family members, if it matters?
Is it important to provide for or protect long-term employees?
How much am I willing to sell the business for, and is that realistic? Will the sale provide the income needed to support my lifestyle?
What do I want my legacy to be? Do I want to provide financial support for the next generation, and if so, for what purposes? Am I concerned about de-motivating children or grandchildren?
Do I want to continue to work in the business after sale?
How will I transition to a new way of living when my business is no longer front and center? What does that mean for my spouse and children?
Before the sale, we recommend that a business owner identifies a strong, cohesive team of professional advisors to help support decision-making. This team should include trusted estate and business attorneys, accountants, and financial advisors, among others, who know what is important to you. This team can help you select the path that supports a successful sale, manages the taxes, and provides for your lifestyle needs as you transition into this next exciting chapter.
Prior to the sale year, there is often planning to be done to ensure that a sale results in the owner’s preferred outcomes. Planning may include identifying how much the owner needs after taxes to support their lifestyle; working with an attorney to draft trust documents; deciding whether changes in company stock ownership supports desired outcomes; whether charitable giving plays a role in offsetting taxes; and so on.
What Should I Do After Selling My Business?
After the sale occurs, positioning your finances in a way to support your needs is the next step. As wealth managers, we focus on providing business owners with tax-efficient investment management. We help clients determine comfort with risk, create “buckets” to support expenses allocated to short, medium, and long time frames, and advise how to best structure cash flow for your needs.
Besides financial considerations, defining what makes up a meaningful life for you post-sale may change. Without needing to devote time to a working business, you may wish to consider another career, consulting, board work, or other ways to stay engaged in the world of work. Alternatively, you may be inclined to retire fully and devote more time to family and friends. You may find volunteering as a mentor, serving on a non-profit board, or engaging in an old or new hobby rewarding. The sky is the limit!
At SJS, we empower business owners to plan for major liquidity events, coordinate with trusted advisors to implement strategies aligned with the owner’s wishes, and support their transition from business owner to financial independence.
We strive to help our business-owner clients feel confident in their financial decisions so they can focus on building a better life for themselves and their families.
Schedule a discovery meeting to learn how SJS offers support and consultation at every stage of a business.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.