How to Plan for a Liquidity Event

Liquidity events can be life changing.

• IPO
• Stock vesting
• The sale of a business
• Major real estate transaction

But without the right planning, mistakes happen leading to a larger tax liability & missed opportunities.

Here are 6 ways to prepare for a liquidity event:

1) Start planning early

The biggest mistake people make is waiting until the event happens to start planning.

But if the event has already happened, you have missed out on so many planning moves.

For employees, you want to plan 1-2 years in advance (when possible).

For business owners, you want to be planning 5 years in advance or you could potentially miss out on QSBS eligibility or stacking QSBS. You need to think about:

• Tax planning
• Charitable giving
• Leveraging trusts
• Racking up losses through direct indexing
• QSBS stacking
• Etc

Start as soon as a liquidity event becomes even remotely possible. This gives you time to model scenarios, put structures in place, and implement tax strategies that are only available before the deal closes.

2) Understand the tax impact in advance

Taxes will be your largest expenses.

It’s essential to know:

→ What kind of income will this be? (Long-term capital gains, ordinary income, etc.)

→ Will this push you into higher federal and state brackets?

→ Are there ways to defer, reduce, or even eliminate some of the tax liability? (and what your tax liability will be)

→ What you will need to pay in quarterly taxes

Some strategies to explore:

• QSBS (Qualified Small Business Stock) exclusion
• Charitable giving strategies like Donor-Advised Funds (DAFs) and donating the investment before the sale. Or you could even think about CRTs / other complex strategies.
• Gifting to family members or trusts before the event
• Installment sales or earn-outs to spread income
• Direct indexing or long short direct indexing the year of or years before to rack up losses

Don’t wait until tax time to figure this out..

3) Build a financial plan around the proceeds

Your liquidity event is not the finish line.

It’s the starting point of what you want to happen.

So before making major lifestyle upgrades or investment decisions, build a plan around:

• Your long-term goals
• Cash flow needs (how much do you actually need to live on?)
• Asset allocation (what mix of investments makes sense now?)
• Debts you want to pay off (can use this to clean up your financial life)
• Risk management (how to protect what you’ve built)

4) Prepare emotionally for a major shift

Liquidity events can be incredibly emotional.

You might feel a mix of relief, pride, anxiety, uncertainty, or even grief.

Especially if you’re exiting a business you’ve poured your life into.

So many people after selling their business will tell you that it felt different than what they thought. It was less exciting and after a couple days all they could think about was what is next.

Make sure you plan beforehand for what's next. Having a trusted financial advisor in your corner can help you slow down, avoid emotional decisions, and focus on what truly matters in the long run.

5) Review your estate plan & asset protection

A windfall changes your exposure & your estate planning needs. Now’s the time to:

→ Revisit your estate plan

→ Consider asset protection structures

→ Evaluate your insurance coverage

→ Explore family gifting or legacy planning

You don’t want your wealth exposed or your family unprepared.

Asset protection looks very different at $200k net worth vs $10mil.

6) Build your dream team

This isn’t a DIY moment. Get experts who can collaborate across disciplines:

• Financial advisor
• CPA/tax strategist
• Estate planning attorney
• Corporate or M&A attorney (if applicable)
• Business broker or investment banker (if selling a co)

A coordinated team ensures nothing falls through the cracks.

We help build and quarterback this team for all of our clients.

Do not wait till after the event to get these people in order, do it long before to maximize it.

At the end of the day, a liquidity event is a rare but awesome opportunity.

The window for planning is often short and you do not want to miss it..

With great planning, you can not only minimize taxes but you can turn it into a life changing event.