Mohsen Ghazi, who advises family offices as a partner at Ashurst Perkins Coie, sometimes hears from families who have had a recent liquidity event and want advice on reducing their tax bill.
“I’ll say, ‘I wish you had called me 15 months ago,’” Ghazi says. “Pre-liquidity planning is really about preserving optionality, and the closer you get to a transaction or deal, the fewer meaningful choices the family has.”
This is just one of the pitfalls Ghazi and others who advise families during business transitions say families need to avoid:
Planning too late: Because it’s not always clear when a liquidity event will happen, it can be hard to know when to start planning. But Ghazi says early planning is less about predicting when the sale will happen, and more about making sure the family still has choices when it does.
When should the planning start?
“I would say three to five years is ideal, but one to two years can still be very productive,” Ghazi says. “Once you have a serious buyer or signed letter of intent, you’re often working with a much narrower set of options.”
Different issues have different lead times.
“For example, estate gift planning generally benefits from acting while the enterprise value is lower. Charitable planning and ownership restructuring needs to be coordinated with the transaction,” Ghazi says. “State residency changes, which are very popular right now, require meaningful, factual lead time. And family governance and family office planning often takes longer than the tax work, because the families need to decide what they actually want.”
Two key elements of a potential sale that families need to start discussing well in advance: the attractiveness and readiness of the business.
“Being attractive to buyers means it’s profitable, operations are running smoothly, and it doesn’t have customer concentration, among other variables,” says Justin Bakewell, managing director and head of client strategy for Pitcairn. “Whether it is ready to sell is a different conversation: Is the ownership ready and aligned? Does the ownership understand all of the different ways to get capital out of the business, to achieve liquidity if that’s their goal?”
Ignoring family issues: Bakewell says families don’t always take the time needed to think about family engagement, legacy, and succession planning.
“Succession planning and legacy planning for the family have to be top of mind well before you exit a company,” Bakewell says. “If you try to cram that into the six months before the sale, it’s very difficult to do.”
This can include — particularly for the founder of a business — coming up with a meaningful plan for their next steps.
“Folks may say they’re just going to play golf all day. That sounds great – until they are only playing golf all day, and they realize that running the business gave them meaning. They need to think about what is the next step?” Bakewell says.
It can also mean thinking through how siblings will share in whatever structure the family sets up.
“One child may love investing, another operating businesses, another philanthropy, another may want very little involvement,” Ghazi says. “Families should distinguish equality of value from equality of assets, control, or responsibility. Trying to make every asset distribution identical can create economic or governance problems.”
Keeping advisors in silos: Families planning a liquidity event will be getting advice from a range of professionals — and it’s important for them to talk to each other.
“Estate planners, M&A counsel, tax advisors, bankers, and investment advisors should be
operating in coordination,” Ghazi says. “Because of the way the transaction advisory industry has developed, it’s very easy for these folks to operate within their own silos.”
Focusing on the wrong measures: As families decide how to structure their enterprise after the liquidity event, it’s easy to focus on one measure, such as estate taxes — or to be attracted to a complex structure because it seems sophisticated.
“Sophistication and complexity shouldn’t be implemented just for the sake of it,” Ghazi says. “Complexity has its own carrying costs in terms of administration and tax filings. You want the structure to solve a real problem.”
Likewise, pre-liquidity planning isn’t just about estate tax planning.
“Often the same structural decisions that reduce estate tax exposure can also address state and federal income tax exposure,” Ghazi says. “The key is identifying the planning that accomplishes multiple objectives at once.”