If you're a business owner in the middle of selling your company, you might think that the deal itself is the main event. But here's the truth: the liquidity event is not the wealth plan. The decisions you're making now about deal terms will shape your financial future. Bloomberg reports that M&A activity is at tremendous levels, meaning more owners are negotiating deals. But without a parallel wealth plan, you might find yourself locked into financial constraints you didn't choose.
Quick answer: A business sale creates liquidity; it doesn't create a wealth plan. Deal terms being negotiated now, like structure, rollover percentage, earnout, and timing of the close, shape what's possible for taxes, liquidity, and diversification later. Owners who wait until after closing to plan the proceeds inherit constraints nobody chose on purpose. The wealth plan has to run in parallel with the deal, not after it.
Why Do So Many Owners Separate "the Deal" from "the Money"?
The pattern: deep in diligence, no conversation yet about what the proceeds need to fund
Many owners are so focused on the sale that they forget to plan what the proceeds should achieve. They dive deep into diligence, negotiating terms, and yet, there's no conversation about the future use of those funds. This is a common pattern, and it can lead to missed opportunities.
Why a strong M&A market raises the stakes on this gap right now
With the M&A market booming, as noted by Bloomberg, more owners are entering negotiations. This increases the urgency to align the deal with a personal wealth strategy. Without it, you risk locking in terms that don't serve your long-term goals.
What Deal Terms Are Actually Wealth-Plan Decisions in Disguise?
Rollover equity and earnouts mean "closed" doesn't mean "liquid"
When you agree to rollover equity or earnouts, you're not fully liquid at closing. This means concentration risk continues, and your wealth isn't as diversified as it could be. It's crucial to understand how these terms affect your financial landscape.
Asset sale vs. stock sale and timing of the close change what's tax-possible
The structure of your sale, whether it's an asset sale or a stock sale, can significantly impact your tax situation. According to SBA.gov, certain structures, like a C-corp ESOP sale under Section 1042, allow for tax deferral strategies by rolling over proceeds into a diversified portfolio. But these options close once the deal is signed.
What Should Run in Parallel With the Deal, Not After It?
Liquidity needs: how much cash, how soon, for what
Understanding your liquidity needs is essential. How much cash do you need immediately, and for what purposes? This should shape your deal negotiations.
Coordinating advisors before signing, not after
Having a team of advisors who understand your goals is crucial. As Kitces.com points out, having "five different advisors with five different plans" can lead to conflicts. Coordination is key.
Family and estate goals: what the money needs to do beyond the owner
Your wealth plan should consider family and estate goals. What do you want your money to achieve beyond your own needs?
Portfolio design for the proceeds once they arrive
Designing a portfolio that aligns with your risk tolerance and goals is crucial. Check out why concentration risk doesn't end at closing.
What Does This Look Like in Practice?
A hypothetical illustration: two owners mid-negotiation
Consider two hypothetical business owners, both in the middle of negotiations. One starts the wealth plan conversation during diligence, aligning deal terms with their financial goals. The other waits until after closing, only to find that their options are limited by the terms they agreed to. This illustrates the importance of parallel planning.
Frequently Asked Questions
When should I start planning what to do with the proceeds from selling my business? Planning should start during the deal process, not after closing. Does rollover equity or an earnout mean I'm still concentrated in my old business after I sell? Yes, these terms mean you're not fully liquid and still have concentration risk. Can the structure of a business sale affect my taxes on the proceeds? Yes, the structure can significantly impact your tax situation. Who should be involved in my wealth plan before I sign a deal? Your team should include financial, tax, and legal advisors. What happens if I wait until after closing to build a wealth plan? You may inherit constraints you didn't choose, limiting your options.
Work with Pinnacle Wealth Advisory
If you're navigating a business sale, it's crucial to build your wealth plan in parallel with the deal. Here's where to start.
This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Consult with qualified professionals for guidance tailored to your specific situation. Doug may provide services and conduct business as Pinnacle Wealth Advisory with advisory services offered through SB Advisory, LLC. Doug Greenberg is an investment adviser representative of SB Advisory, LLC, a registered investment adviser.
