Business owners are so busy focusing on running their companies that planning from a personal perspective for a sale or IPO can take a back seat. Is that your case?
Navigating a liquidity event is not an easy feat: Beyond the immediate tax and legal ramifications, it has long-lasting impacts on the financial and lifestyle choices of a family.
In this episode of Life & Legacy, Carol Bernatzky and James Chilvers, from the Wealth Advisory Practice at J.P. Morgan Private Bank, discuss how entrepreneurs can approach the sale of a company or an IPO, and what they should keep in mind before they take the next step in their business life cycles.
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Carol Bernatzky: Hello, and welcome to our Life & Legacy podcast series. In this episode, we will be discussing key considerations for entrepreneurs as they think about the next step in the life cycle of their business – IPO or Sale. We will cover planning related to the liquidity event as well as personal and family planning considerations. We will also provide some client case studies to bring these concepts to life. As Wealth Advisors, we work with clients to plan for the future so these topics are top of mind for us.
My name is Carol Bernatzky, and I am a Wealth Advisor on the J.P. Morgan Latin America team. I am here today with my colleague, James Chilvers, a Wealth Advisor on the J.P. Morgan U.K. team. Welcome, James.
James Chilvers: Thank you, Carol. Over the past 170 years J.P. Morgan Private Bank has helped international business owners, entrepreneurs and their families successfully navigate transition events and business exits. What our collective experience has shown us is that the importance of giving early and detailed consideration to the aspects of the transaction that impact the shareholders and their family cannot be overstated.
Carol Bernatzky: That’s right James, we understand that most business owners are so busy focusing on running their organization that planning from a personal perspective for a sale can take a back seat. We recommend, however, that if possible planning should start as much as two years before the anticipated transaction. Experience tells us that if these matters are left to chance, opportunities will be missed and both immediate and long-term financial returns can suffer as a result.
James Chilvers: I completely agree Carol. Some entrepreneurs are nervous of tempting fate or jinxing a deal and we appreciate that, in those circumstances we encourage them to focus on a short checklist of the most crucial considerations for them and their family. Shall we run over some of those key points?
Carol Bernatzky: Absolutely. Let’s start by thinking about the team our entrepreneurial clients’ should be surrounding themselves with as they approach the transaction. Do you have the right independent tax and legal advice and in all the right jurisdictions? So many times we see that our clients have advisors, but they tend to be more focused and experienced in corporate or transactional matters, but not necessarily experts in personal tax and legal issues.
Let me give you an example. We have been working with a Chilean family for over two years.
The siblings own a retail business and given the changing political landscape over the past few years have been looking to sell and for some of the family members to move to the U.S. As the family began to think about a possible sale, the local advisors were able to modify the corporate structure so as to plan for a very tax efficient sale in Chile. These changes however would cause negative tax consequences once family members moved to the U.S. As the discussion advanced the family quickly realized that they needed to incorporate a U.S. advisor to work side by side with their local advisors to not only plan for the sale but also for the future of the family patrimony which would now be in the U.S. as well as Chile.
James Chilvers: Not being aware is really the biggest problem Carol. The next point that should be considered is the family’s shareholding in the business. Is it held optimally as you prepare your business for the transaction? Is the way you and your family hold the shares in the business going to help you meet your medium to longer term goals? Are there any reliefs that might apply to your shareholding that won’t apply when you sell those shares, for example from estate or inheritance tax? How will your estate’s exposure change between now and after the transaction?
Carol Bernatzky: Which brings us to thinking about wills, estates and inheritances. We talk about these concepts with all our clients but particularly in advance of a significant change in financial circumstances, so having an up to date will is very important. Should the worst happen you want to ensure that your assets can pass to your heirs in a safe and efficient manner
.James Chilvers: Moving on from the tax and legal considerations, we have found working with our clients to help them identify the short, medium and long term objectives for their wealth in advance of a transaction can be really powerful. It can even support them as they decide which offers to pursue for their business and which to pass on. It doesn’t just relate to their financial needs, but can for example extend to whether they would like to maintain a position in the business after the transaction or not.
Carol Bernatzky: Those issues are so important James and really help to define the family goals. Many times we work with a family to assess their short term liquidity needs immediately post transaction or help them identify how much they should take off the table to secure their family’s spending needs for the long term.
James Chilvers: That’s correct. We find that helping families identify their so-called ‘number’, in other words, their iron reserve or sleep easy pot, it can give them a sense of freedom to be thoughtful about their other goals and objectives for their wealth and to work with the rest of their family to identify the meaning and purpose they ascribe to it.
This is different for every family, it might be about setting aside a ‘growth’ pot to pursue the next entrepreneurial endeavor, or it could be that the family have philanthropic objectives they would like to start on or add to.
For example, we had one family who was going to experience a significant liquidity event. Up until that point, the family had been living fairly modestly, and hadn’t put a lot of thought into how that might change after their liquidity event. We worked with them to assess their current expenses, forecast the cost of their desired holiday home, as well as the financial implications of other lifestyle changes. We also helped them identify an amount that would fund an “iron reserve” for their long term investments. The analysis seemed to help them spare a significant amount of inertia, and focus on what was truly important for them.
Carol Bernatzky: James, I’m so glad you brought up this example. Lifestyle considerations are certainly an important piece of the equation. Where do we want to live? If we have children, where do we want them to go to school? How will our lives change after the transaction?
These points remind me of a conversation we had a few months ago with a couple that just became billionaires. We met soon after the IPO of their company and the one item on the top of their minds was not taxes but rather how to explain to their children their new found wealth, which was made very public. They mentioned that they did not plan to move to a bigger home and that they had strong roots and friends where they lived, but what weighed heavily on their minds was making sure that their children were well aware and educated with respect to the advantages and burdens of their family patrimony. These conversations are the “soft issues” we as Wealth Advisors help clients navigate but in reality these family governance and wealth conversations are what lead to helping define a family’s true goals.
James Chilvers: Yes and it raises longer term questions too, particularly if it is the family’s first significant liquidity event. Do I want to give wealth to my wider family? Should I do it now or later? How should I communicate my intention to make that gift and how will it be received?
How do we need to set ourselves up to protect our new found wealth? Do I need to worry about the balance sheet of the organization on which my money is held? What about currency risk or the impact of inflation?
Carol Bernatzky: That’s before we get onto the tricky topic of divorce! Depending on the jurisdiction, does the family have a policy in place to encourage pre-nuptial agreements before marriage? How should a family think about one and how should that be communicated? For many families this is a very sensitive topic and often overlooked especially among young entrepreneurs who started a business in their garage!
James Chilvers: Such an important point Carol, we often find our clients are really focused on lots of other potential ways in which their hard earned family wealth could be diminished, but miss one of the most common reasons family wealth can be reduced over time.
Carol we haven’t even got to speaking about making the first investment outside of the business!
Carol Bernatzky: I know! For so many entrepreneurs making investments in public markets or working with a Private Bank or Wealth Manager can be a completely new experience – it is a new “business” for them. Often they have invested every last penny they have back into their own business – and that is part of the reason it has been so successful – so to start to think about their wealth in a different way and to start to rely on others can be a big step; however, this is where we at JPMorgan can really help – we can be by your side educating and advising along the entire journey.
James Chilvers: There is so much to think about and lots we haven’t had time to cover here today.
The Wealth Advisory Team at JPMorgan Private Bank is here to help you plan for and structure your assets with an eye on your global portfolio. We believe this kind of thorough and thoughtful planning can help preserve your legacy and pass your vision to generations to come.
That’s it for this episode. Thank you for joining us for the latest instalment of our Life and Legacy series.