Five Steps to Optimize your Financial Resources before a Liquidity Event

A liquidity event is much more than just a sudden inflow of capital. For many individuals, it symbolizes the first step towards an entirely new life. Whether you are expecting an inheritance, selling a business, or about to convert your equity into cash, a liquidity event can kick-start a completely new way of living. Before entering this new chapter of opportunity (and potential risk), the following are some recommended steps you can take to ensure the wealth you have generated will serve your goals.

1. Assemble a Trusted Team

While it may feel as though your liquidity event will bring you a newfound level of financial independence, assembling an expert team of financial advisors will allow you to optimize your financial resources. A team of tax, financial planning, legal and investment professionals will guide you through the process of building a plan for your capital that serves both your short-term and long-term needs. We recommend that your wealth advisory group is registered as independent fiduciaries, so that they are required to provide advice that is in your best interest. Due to the complexities that typically arise from sizeable liquidity events, we recommend that the team you build contains several individuals with distinctive areas of expertise.

2. Establish your Financial Plan

With your trusted team in place, take the time to go through your financial goals.  If you have a partner, have a full discussion with them and your financial advisor in order to ensure all pieces are captured.  These goals should be reflected in a personalized financial model to confirm the level of lifestyle your assets can support, as well as whether there is any additional capital available once your lifestyle needs are met (ie. risk capital).  This additional capital can be put to specialized use such as setting up a foundation, gifts to family members, or it can be invested in a more growth oriented style.  Assuming the liquidity event is a one-time occurrence, you will want to ensure you approach the use of your resources slowly in order to preserve, protect, and if desired, grow it over time.

3. Build a Diversified Portfolio

Working with an investment counsellor to create a bespoke investment policy is an essential step in preserving and optimizing your newfound wealth. A strategic asset allocation will be determined, which combines capital market expectations your objectives, risk profile and constraints. It will guide the decision-making for your portfolio in a systematic way, which will help you diversify your net worth as well as achieve the goals outlined in your financial plan. You will want to meet with your investment counsellor periodically in order to review the portfolio’s objectives, positioning and performance.

4. Seek Tax Optimization

With newfound resources, there will likely be opportunity to establish tax strategies prior to funds being deployed.  Once your financial plan is completed you will have better visibility to strategies that would suit your situation and goals best.  This could mean establishing a spousal loan, a family trust or a holding company to tax effectively earn investment income. Perhaps your legacy goals can be partnered with tax needs and a foundation can be established to offset the tax triggered by the liquidity event, which must be done in the same calendar year.  A foundation is also a great opportunity to explore family values and start/enhance financial literacy for your children or grandchildren.

5. Formulate your Estate Plan

A final step not to be forgotten, establishing an estate plan has long-term implications based on how it is implemented.  Even if you had a will prior to your liquidity event, you should review how your assets are distributed to ensure you are comfortable with the timeline and amounts that your beneficiaries will receive.  Is now the time for an estate freeze? Do your beneficiaries live out of the country?  Are there taxes in foreign countries to consider?  Once put in place, your estate plan will provide you with peace of mind, knowing your loved ones will be well cared for after your lifetime.

What’s Next?

In conclusion, a liquidity event is an important milestone in your life that will likely represent a significant magnification of wealth. Optimizing the outcome through early planning is paramount for your success.