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Over the past decade, there has been an increasing trend of liquidity events for family businesses and new entrepreneurs. With a growing and dynamic venture capital and private equity industry and vibrant capital markets, clients often ask how to prepare for a liquidity event i.e. an acquisition, merger, an IPO or any other action allowing founders and early investors to cash in some or all of the ownership shares. Advance planning can better prepare the family for the event. I believe that before making a decision, people should look at it with their heads and hearts.

Through our head-dominated rational thinking, we need to assess four key issues: the taxation on the transaction and how to optimize it for taxation, the jurisdiction where liquidity is generated, the investment vehicles we should use in a transaction. prospect of a post-liquidity event. , and how the proceeds of liquidity should be invested.

The softer aspects of the heart are often much more difficult to tackle and focus on good communication between all family members and the need to maintain strong family bonds throughout the process.

Over the course of my career, I have seen two types of liquidity events for clients: one where a family has completely left a business and the other where there has been a partial exit. Full exits from a business are much harder on families, often accompanied by an identity crisis as family members who were actively involved in the family business. This period of reflection on “what to do next” for the second innings can often span two to three years, and it was during this time that I have seen most family managers set up their family office.

The family office becomes an opportunity to acquire new skills, namely the management of family investments and the long-term vision of wealth creation. It becomes a time to network and better understand the new and related sectors in which the family business has been involved. It also becomes an opportunity for family members to become responsible stewards of wealth and educate the next generation on the value of money and its strength. for good g

In any event of a liquidity event, family leaders are deeply concerned about the influence of new wealth on the next generation, and that it should not create a sense of entitlement and hamper entrepreneurial activities. “From shirt sleeves to shirt sleeves in three generations” plays a lot in their minds. However, using the right investment structures, such as trusts, can help manage the circumstances in which the next generation can access their share of the wealth, typically for businesses, their first home, college, or college. unforeseen medical expenses. A growing trend that has been particularly encouraging is to see more women, whether wives or daughters, involved in discussions around a liquidity event. Decision making has become much more inclusive.

Once the family gets into cash, I always cautioned not to invest immediately. Devote sufficient time to financial planning, understanding the long-term financial goals of the family as a whole and of individual family members. Wealthy distributors eagerly scan the media for liquidity events and most families do not know enough about the broader wealth management landscape or the subtle nuances between advisers and distributors to be able to do so. the difference when approached by wealth management companies. My advice is to spend time understanding the different actors, their strengths and their capacities; and ultimately engage with a company that works for you and keeps your long-term interests at the heart of their advice.

There are no quick fixes to asset allocation in the investment portfolio and every family is different. You should arrive at your basic investment portfolio after setting aside money for tax payments, debt repayment, real estate purchases, and philanthropic considerations. To preserve wealth over the long term, it is important to have and stick to strategic asset allocation. Asset allocation is only a risk diversification tool, as different asset classes behave differently over varying periods with different tax treatment. It is easy to get carried away, in markets like the one we know today, to over-allocate to listed equities.

The best family offices keep strategic asset allocation at the heart and use tactical allocations to move within plus or minus 10% of established limits. This is where governance comes in to manage a liquidity event. It is important to have a formal investment committee, comprising key family members and independent external advisors to manage and oversee the portfolio. Equally important is a formal investment policy document to define the limits of risk, which in many cases includes negative sector exclusions and the integration of environment, social and governance (ESG) into the taking. decision-making. Product allocations are the last consideration when building a portfolio and as a general rule when looking at your portfolio you should be happy to own 60 percent of the products for 3 years, 20 percent for 5 years and 20 percent. percent of investments for the next 10 years.

A question often asked is whether you should plan for your estate before a liquidity event. My advice is to treat them as two separate events. In some cases, before a liquidity event, you may want to transfer some of the wealth-generating assets to your children or grandchildren. This is quite common, but the planning for the larger succession will differ depending on whether the liquidity event triggers a full or partial exit from the business. In the first case, it will be the separation of assets while in the second, the search for a successor to run the family business will be the overarching theme of succession planning.

The author is the founder and CEO of Waterfield Advisors.

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