By Matthew Fatz, CFP®
Liquidity events like acquisitions and IPOs offer an opportunity to realize a return on your investment. If you’re like many investors, you may be hesitant to let go of your shares. But when you have a clear plan for your new liquidity, you might find yourself moving closer to your financial goals.
Whether you’re selling a business, moving toward an IPO, or otherwise approaching a potential liquidity event, these tips may help you capitalize on your new opportunity.
Shift Your Mindset
Many people don’t take full advantage of liquidity events because they’re stuck in a mindset of “What could this stock become?”
There’s nothing necessarily wrong with wanting to see where a stock can take you. But if this becomes your exclusive focus, you might miss out on the ways your assets can support your lifestyle. Consider shifting your mindset to “What lifestyle certainty can this liquidity provide?”
Identify Underfunded Goals
Liquidity events give you a chance to look at your finances and determine which goals are currently underfunded within your financial plan. For example, you might start by reviewing existing goals:
- Retirement
- Paying for your children’s college tuition
- Eliminating your debt
- Buying a vacation home
Once you’ve determined which goals are underfunded, you might plan to sell enough shares to fund them sooner than you initially planned.
Remember the Importance of Diversification
It can be risky to rely on a single stock to fund your retirement. Liquidity events can offer you a chance to diversify even further.
Examine Your Reasons for Wanting to Keep Company Stock
During liquidity events, many executives hesitate to sell company stock. Do you find yourself resistant to the idea? If so, take some time to think about why.
Think Like the CFO of Your Household, Not Your Business
Some executives feel like they have more control over their company’s future than they actually do. As a result, they might view selling stock as a lack of confidence. That’s not necessarily the case. Instead, it can be a sound risk-management decision to help shield you and your family.
Hold Only As Much Stock As Your Financial Plan Allows
Many executives rely on outsized, post-IPO gains from company stock to resolve their underfunded financial goals. This is a bet that rarely pays off.
Run a Tax Projection Before the Sale
To help avoid tax penalties and associated issues, consider running a tax projection before making sales during liquidity events. If you do sell, it’s a good idea to set aside estimated taxes immediately.
Spreading Out Tax Consequences Over Time? Do It Strategically.
If you don’t want capital gains taxes to hit you all at once, consider spreading them out over time. For example, you might schedule trade dates and amounts at regular intervals in the future.
Consider Using Liquidity to Fund Charitable Goals
For many of our clients, charitable giving is an important part of a well-rounded financial plan. If you have upcoming liquidity events as well as charitable aspirations, consider using your liquidity to fund one or more of the following:
Both options come with tax advantages for you. Donor-advised funds give you an immediate tax deduction while allowing you to spread your financial gifts out over time.
Charitable remainder trusts allow you to sell stock without immediately incurring capital gains tax. You can create a tax-deferred pool of diversified assets and receive income over time, spreading the tax impact out over several years.
Let Us Help You Manage Liquidity Events
At Thrive Wealth Management, LLC, we understand the importance of thoughtful preparation before liquidity events. Whether you have a general plan in place or don’t know how to proceed, we’re ready to help you put your new liquidity to work for you.
Have questions about how we can help? Get in touch online today. To schedule a meeting, call (215) 376-5530 or email mfatz@thrivewealth.com.
Frequently Asked Questions
What are liquidity events, and why do they require advance planning?
Liquidity events occur when an illiquid asset, such as company stock or a business interest, becomes convertible to cash through an IPO, acquisition, or buyout. Because liquidity events can trigger tax consequences and portfolio concentration risks, advance planning can help you decide how much to sell, when to sell it, and how to align new liquidity with long-term goals like retirement, lifestyle security, and diversification.
How should investors decide whether to sell or hold shares during liquidity events?
During liquidity events, it’s common to focus on a stock’s future potential rather than its role in your overall financial plan. Another approach to consider is to evaluate how much company stock your plan can support without jeopardizing other goals. Selling a portion to fund undercapitalized priorities or reduce concentration risk can provide greater financial stability while still allowing you to participate in future growth.
How can liquidity events be managed in a tax-efficient way?
Liquidity events may create sizable capital gains, making tax strategy a critical part of the decision-making process. Running tax projections before selling, spacing sales over time, and using charitable strategies such as donor-advised funds or charitable remainder trusts may help manage the tax impact. Thoughtful coordination allows liquidity events to support both personal wealth goals and philanthropic priorities while avoiding unnecessary tax strain.
About Matthew
Matthew Fatz, CFP®, is a Financial Planner at Thrive Wealth Management, LLC, a boutique financial planning firm in Blue Bell, Pennsylvania. Matt brings an approachable style to the table and centers every client’s plan around their goals and dreams (not spreadsheets or markets). Clients often come to him asking one question: “Am I going to be okay?” Matt takes pride in answering that clearly, providing calm, objective advice that helps people act with confidence. He follows a consistent process with every client, but his recommendations are always tailored to each person’s unique situation; and he explains complex decisions in plain language so clients can truly understand their options. What he finds most rewarding is helping people overcome the emotions of money and gain the relief of having a clear, confident plan.
Matt began his career in 2008 with Bernstein Wealth Management, working with high-net-worth clients through the Global Financial Crisis. He later supported advisors nationwide at SEI Investments and then worked directly with families at United Capital before joining Thrive. A CERTIFIED FINANCIAL PLANNER® professional, Matt is a graduate of Susquehanna University with a BS in Finance. He lives in Wayne, PA, with his wife, Amy, and their three sons. A big sports family, they love basketball, golf, lacrosse, and the outdoors. Matt also enjoys coaching his boys’ basketball teams and spending time near the water. To learn more about Matt, connect with him on LinkedIn.
Disclosure:
This material is provided for informational and educational purposes only, should not be viewed as an exhaustive discussion of the topics presented, and should not be construed as individualized advice for any reader’s personal circumstances. For guidance on how these matters may impact your financial plan or investment portfolio, please contact your Thrive Wealth Management, LLC representative. While the information presented is believed to be factual and up to date, Thrive Wealth Management, LLC does not guarantee its accuracy and, due to various factors, including but not limited to changing laws and regulations, this information is subject to change. All expressions of opinion reflect the judgment of the authors as of the date of publication. Thrive Wealth Management, LLC is not a law firm or an accounting firm, and no content contained herein should be construed as legal or accounting advice. Please consult with the qualified professional(s) of your choosing for legal and accounting advice.
Please visit https://thrivewealth.com/disclosure for additional information regarding the professional designations and credentials discussed. Professional designations and credentials do not guarantee success or any particular investment or financial outcome.
Past performance does not guarantee future results. All investing comes with risk, including risk of loss.
