The sale or transfer of a business requires months or even years of detailed business planning. It is the culmination of so much work, and represents so much sweat and sacrifice: Why would anyone leave a single manageable detail to chance? However, by failing to create a corresponding wealth plan, business owners of all types can leave considerable sums on the table.
It’s understandable, of course. The owner – whether an entrepreneur, an executive with a significant shareholding, a private equity or venture capital investor, or a family office director – is so wrapped up in the business itself that the treatment of the eventual sale proceeds can be the furthest thing from his or her mind. But that deal won’t be a true success if it isn’t structured to meet the needs of the individuals and families involved.
For anyone even contemplating the sale of a business, the time to plan is now. As remote as they might seem in the run up to a transaction, the seller’s goals for lifestyle spending, investment, family wealth transfer, charitable giving, and all the related tax issues, need to be considered – and integrated – well in advance. Ideally, the corporate and wealth management advisors will work together. In the heat of the deal, there will be little time for thoughtful planning, but there will be all the time in the world for regret.
Consider the experience of an entrepreneur in her late 40s who sold her small biotechnology company for mostly stock, in the expectation that the value of the acquiring company would continue to rise. Unfortunately, she did not fully grasp the ramifications of the relevant securities laws nor assess her post-deal objectives. First, she accepted a deal comprised mostly of stock and a small cash component that together was higher than some all-cash offers. Worse still, the shares were subject to very onerous resale restrictions over the course of the next few years.
By the time she consulted a wealth advisor, she had not fully appreciated the relatively low liquidity in the stock, which made direct hedging almost impossible. Before the restricted period had elapsed, the acquiring company fell on hard times and decreased almost 90% in value. Had her needs been more thoroughly analyzed from her personal financial perspective and the deal been structured to weigh more heavily to cash, she could have funded her lifestyle and new business requirements for long enough to get her next company off the ground. Instead, she was left with no choice but to abandon her entrepreneurial plans and take a job with a big company.
Advance planning can make an enormous impact, to the seller and his or her family and philanthropic interests. The happier experience of a serial venture investor evaluating a late-stage start-up serves as a case in point. He knew, thanks to time already spent with his advisors, that his current financial position was sufficient to meet his long-term lifestyle objectives and was looking for opportunities to transfer wealth to his heirs. Upon identifying the next promising investment opportunity, he directed 50% of the initial $2 million investment in the start-up to a grantor- retained annuity trust, or GRAT, for three years, which he believed was a reasonable time frame for the firm to realize its potential.
He was right. The company went public through an initial public offering, or IPO, and substantially increased in value during that time. At the termination of the GRAT, $15 million in stock was successfully distributed to three grantor trusts for his adult children, free of gift tax. When a portion of stock was sold, he, as grantor, was required to pay the full income taxes due on the sale (which is essentially making an additional tax-free gift to the trust) and the trust retained the full principal. The investor then, with the help of his advisors, decided to fully diversify the trust (and step-up its tax basis) by substituting current high-basis cash and fixed income assets into the trust in return for the highly appreciated shares. This swap provided the trustee and investment advisor with the flexibility to create a long term portfolio allocation free of concentration and tax restrictions for each beneficiary.
Now in possession of the highly appreciated shares, the investor contributed them to a private family foundation to seed the family’s philanthropic mission, as determined by him, his wife and his three adult children. The foundation’s trustees sold the shares without recognition of a capital gains tax, and the investor received a charitable income tax deduction based on the fair market value of the gift.
Obviously, he was fortunate in the share price performance of the company, while the biotechnology entrepreneur was not. Without proper wealth planning to complement his investment decision, however, the $15 million effectively passed to the trusts would have been subject to a combined federal and state estate tax of more than 50 percent.
Each transaction is different, as are the goals and constraints of individuals involved. The decision around the actual proceeds of a transaction should include an assessment of the differences in value and associated risk, deal terms, and the potential impact of securities law restrictions, which can significantly affect the ultimate value.
While utilizing the proper trust vehicles is important to ensure success of the plan, including a long-term governance and asset protection structure for the assets, the selection of an undervalued asset with long-term potential and the timing of the gift of that asset are likely to be the most critical factors in the success of any wealth transfer strategy. Examples of these assets include: early stage direct venture capital or private equity investments (with potential for an IPO or sale), private business interests and the general partner’s capital and carried interest in alternative investment organizations, which are similar to a call option on the future success of the fund.
While the solutions and techniques available vary by the individual’s circumstances and the immediacy of the transaction situation, careful advance wealth planning will provide a thoughtful foundation from which to make sound decisions during the anxious times prior to a transaction.
Chris Zander is the Chief Wealth Advisory Officer at Evercore Wealth Management. He can be contacted at

A Pre-Transaction Checklist:

Effective Communication with Corporate, Wealth Management and other Advisors

  • Early stage pre-transaction strategic wealth planning to help shape corporate transactions
  • Wealth planning to integrate corporate advisors and both personal legal and tax counsel
  • Wealth planning to align with corporate governance and management structures

Lifestyle Planning

  • Cash flow requirements for the post-deal environment
  • Investment requirements for new ventures
  • Amount to be transferred to the succeeding generations
  • Philanthropic legacy objectives
  • Post-deal, goals-based asset allocation and investment management

Income Tax Planning

  • Deal structure to optimize the post-tax outcome in the context of the individual’s lifestyle, family, business and philanthropic goals
  • Coordinate outright sales with tax-efficient charitable gift planning strategies, including gifts to private foundations, charitable remainder trusts or charitable lead trusts to satisfy various objectives

Estate and Wealth Transfer Planning

  • Identify wealth transfer goals
  • Analyze the current and potential future value of assets for gifting
  • Leverage applicable federal and state gift tax exemptions
  • Execute appropriate freeze strategies, such as GRATs or sales to defective grantor trusts, to pass the expected appreciation of high-potential assets once gift tax exemptions are exhausted
  • Determine the most effective trust entities with flexible terms and a carefully selected trustee to ensure proper governance and oversight

Philanthropic Planning

  • Consider individual and family legacy goals
  • Fund philanthropic interests to meet those goals, in the context of other commitments and objectives
  • Optimize charitable deductions while meeting philanthropic objectives

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