A liquidity event can be a once in a lifetime occurrence and may present specific issues an individual has never dealt with before. Liquidity events fall into three broad categories:
- sale of a business or major asset;
- inheritance; and
- divorce settlement.
Many business owners are savvy with money and know what to do when the proceeds of their business sale arrive, while others – having spent years focusing their energy on the growth of their business – are at a loss to know what comes next.
A study by The Economist1 found that a majority of families who sold businesses felt a sense of loss in the years after the sale. Therefore, planning a business sale well in advance and gaining the right advice along the way is important, but so is planning what to do after the sale.
The sale process:
Get the right people involved – Your first port of call should be your accountant or business adviser. Find an adviser who has this experience and who is up to date with CGT matters.
Next you need an experienced commercial lawyer to ensure property and legal issues are dealt with properly. The right sale agreement will ensure you get all the tax breaks you are entitled to.
As a key consideration, you will need to make sure your assumptions about how much money you will end up with after the sale are right. Ensuring your savings are adequate for the plans you have made is best done before the sale process begins.
Get the right tax advice in advance – The capital gain on the sale of a business asset is subject to tax but there are ways to maximise other tax benefits, particularly if yours is considered a small business. If you meet tax office guidelines you may be entitled to significant tax exemptions. This is a complex area with many traps so make sure you get advice from a Chartered Accountant or CPA as early as possible.
While sound planning for your business sale will maximise your financial outcome, planning for life after the business sale will help ensure you enjoy the wealth you have released.
Inheritance can be complicated and, depending on your family’s circumstances, the amount of your inheritance can be a real shock. Parents born in the 1930s have very different attitudes towards money and for many it is a subject that simply isn’t discussed in polite company. As a result, when the inheritance does come through, the size can be something of a surprise to the recipients.
Receiving a large inheritance can be quite challenging for people. On the one hand they may have feelings of gratitude to have received a sum that could be life changing, but there may also be emotion around how to deal with the money. When the inheritance is significant or represents newfound wealth, it is common for recipients to feel a real weight of responsibility to make the right decisions and to steward the money responsibly. If you have never had the experience of managing a large sum of money before, it is common to feel completely unprepared for this responsibility.
Here, wealth planning needs to be thorough and incorporate a large education component, to ensure the inheritor has the financial skills they need to feel in control.
It is rare that inheritors go it alone. Trust will be the main currency when choosing an adviser. Most people understand there will only be one opportunity to get the planning right.
The process leading up to a divorce settlement represents an extraordinarily difficult period in anyone’s life. Regardless of who initiates it, divorce involves intense emotions, potentially including anger and sadness. Financial settlements are particularly difficult for women if they have not been the main income earner in the family, and even harder when the woman has had little input into or knowledge of the family’s finances.
Divorce lawyers report that professional advisers such as the family accountant, faced with a relationship breakdown, almost always retain their relationship with the husband, who is perceived to represent the better long-term business opportunity.
In Australia, the trend has been for the Family Court to move away from ‘maintenance’ orders and it is now increasingly common for divorce settlements to involve a ‘clean break’ settlement.
These factors leave women in particular in a difficult position. Not only are they seeking to build a new life but they also need a plan for their financial settlement, so it is employed as effectively as possible. In research conducted by my business partner Chris King, four recurring themes became apparent when divorcing women discussed their financial challenges. These themes include lack of knowledge of the family’s affairs; the overwhelming complexity of having to build a financial plan from scratch; no source of income; and the newfound responsibility for the future.
Approaching this new chapter of life with confidence requires an open mind, a willingness to tackle new things and a commitment to taking control.
In order to be in control of your finances and deal successfully with a liquidity event, it is well worth finding a trusted adviser who you can discuss your situation with.
Capital Partners Private Wealth Advisers is the FPA Professional Practice of the Year, and is committed to helping people live richer, happier lives. If you feel you need a second opinion on your financial situation they are a great place to start!
1 The Economist, Rich Man’s Burden, 14th June 2001.
2 King, C. F., Confident Future: Creating a Sound Financial Future for Women after Divorce, White Paper, Capital Partners Private Wealth, 2016.