Planning for success
How to position for both business and personal success on a business exit
As a start-up founder or entrepreneur, you typically have a laser focus on your business. Yet too often the time and effort you put into growing and preparing your business for a sale means your personal planning takes a back seat.
As a start-up founder or entrepreneur, you typically have a laser focus on your business. Yet too often the time and effort you put into growing and preparing your business for a sale means your personal planning takes a back seat.
From Silicon Valley to Boston, we’re in what may be a golden age for start-up businesses. While fortunes can be made through owning a single business, they can also be lost. By planning for the personal side of a liquidity event, both before and after the transaction, you can help mitigate risks associated with a founder’s equity and set the stage for personal financial success.
As the saying goes, “failing to plan is planning to fail.” Many wealthy start-up founders of the dot-com boom in the late 1990s lost everything in the dot-com bust of the early 2000s. Below are some of the key steps that should be explored well in advance—perhaps at least one to two years—of a liquidity event.
Having a team of outside professionals who can review your personal financial affairs is key to your future financial success. This is especially true as your business increases in value. This team is part of ensuring that certain documents are in place that can serve you later. Ideally your team would include:
- A certified public accountant (CPA) to make sure tax returns are properly filed and tax elections are made on a timely basis.
- A trusts and estates attorney to make sure an estate plan is in place. The attorney can also help draft documentation regarding gifts to family members and charity.
- A qualified wealth manager to help with financial planning, including modeling of making early tax elections in connection with equity holdings.
For best results, these outside advisors would collaborate with each other, each bringing specific expertise to bear regarding important decisions along the way.
A financial plan forms the foundation for your personal planning around a liquidity event and beyond. Especially as you ready the business for sale, it is easy to overlook financial planning, which allows you to:
- Preview what your financial life may look like post-sale
- Stress-test a host of variables—much as you do with the business itself
- Arm you with the information you need to make key decisions
A good financial plan begins by evaluating your financial goals. Once your goals are established, the plan will determine your cash flow needs and stress-test the likelihood of reaching certain goals going forward. In particular, the financial plan tests the following five key variables among others:
- How to manage company holdings prior to exit (exercise/hold, exercise/sell, 83(b) elections)
- Deal terms (exit price, earn-out, rollover, tax considerations)
- Retirement date and lifestyle spending
- Asset allocation (including diversification from company concentration)
- Legacy planning (asset transfer pre-/post-sale, charitable planning)
The financial planning process allows you to determine the amount of core capital or assets that will be needed for living expenses with a high degree of confidence, even if the capital markets do not perform well over time. It takes into account considerations such as lifestyle spending, time horizon and how assets are allocated.
For example, the higher the spending, the longer the time horizon and the lower the allocation to return-seeking assets, the higher your required core capital will be. Any assets above those required for your lifestyle needs would be considered legacy capital and could be set aside using wealth transfer techniques to potentially minimize certain income and transfer taxes.
The financial planning process can support you throughout the lifecycle of your business, providing you with the data you need to aid wise decision-making pre- and post-sale.
To learn more about important planning considerations and strategies to optimize your business and personal success, see our whitepaper, Personal planning for start-up founders.
Are you a client?
