Navigating Liquidity Events and Effective Liquidity Management

Liquidity events allow founders and early investors to convert their ownership equity into cash through sales, mergers, acquisitions, public offerings (typically IPOs) and other transactions. When managed correctly, a liquidity event can reshape your financial future and establish a legacy for generations to come. But navigating the process to fully capitalize on the opportunities can feel overwhelming: You’ll need make critical decisions regarding tax optimization, risk management and wealth preservation strategies all while staying focused on business operations.

Successful strategies encompass everything from initial public offering (IPO) planning and navigating mergers and acquisitions liquidity to estate planning and managing liquidity after a sale. Here’s an introduction to help you make the most of your liquidity event.

Quick facts:

• Liquidity events let founders and early investors convert their ownership equity into cash.
• IPOs, mergers and acquisitions, private equity buyouts and secondary market sales are common types of liquidity events.
• Strategic planning can minimize taxes, deliver greater returns to stakeholders and strengthen financial stability.

Understanding liquidity events

A liquidity event is an IPO, acquisition, merger or other transaction that lets shareholders turn their equity into cash. Liquidity events help turn assets into cash, allowing for wealth diversification, tax optimization and long-term financial security. Here’s an overview of the most common liquidity events:

• Initial public offering: An IPO is when a company “goes public” by offering newly issued shares of its stock to the general public through a stock exchange, such as NASDAQ or the New York Stock Exchange (NYSE).¹
• Mergers & acquisitions: An M&A occurs when two companies join together, either through a merger, where both companies combine their assets to create a new entity, or an acquisition, where one company purchases and absorbs the other.²
• Private equity buyouts: This transaction happens when a private equity firm purchases a significant or full ownership stake in the company to restructure, enhance operations and increase value before selling it for a profit.³
• Secondary market sales: In a secondary market sale (aka a “secondary”), private company shareholders (e.g., early investors or employees) sell their shares to outside buyers, typically before a major liquidity event, such as an IPO or acquisition.⁴
• Business succession sales: These transactions happen when a business owner sells their company to a family member, business partners, key employees or outside buyers, often when the owner is retiring, exiting the business or as part of succession planning.⁵

Keep in mind that each liquidity event has unique ownership, control and financial implications. Planning is essential to maximize benefits and minimize risks.

Financial implications of liquidity events

A liquidity event can be a major financial milestone, but there are a few implications to consider while planning your exit strategy.

• Personal finances: A liquidity event can provide personal financial freedom, but it can also introduce new challenges, such as defining family goals and priorities, making smart investment decisions, planning for philanthropy and preserving wealth for the next generation.
• Business finances: Liquidity events can mean changes in a company’s structure, operations, regulatory requirements, cash flow and more. Any mismanagement can lead to financial instability, operational disruptions, missed opportunities and other negative consequences.  
• Tax implications: Your income may skyrocket following a liquidity event, and the tax impact can be tremendous due to capital gains tax, ordinary income taxes (e.g., from equity compensation like RSUs) and the alternative minimum tax, depending on the situation.⁶
• Lack of diversification: A liquidity event can leave you overexposed, with most of your wealth tied to a single asset (like your company’s stock). A lack of diversification makes you more vulnerable to market fluctuations, which can jeopardize your overall financial security if the asset loses value.

Strategic preparation for a liquidity event

Preparing for a liquidity event takes careful planning to maximize the financial benefits and minimize the risks. Whether going public or selling to an outside buyer, strategic preparation helps ensure a smooth transition.

Structuring the business for an event

Getting the business financially and legally ready before a liquidity event is essential. Well-organized financial statements and legal documents can make the business more attractive to buyers or investors. Compliance with regulations is equally important, as legal or tax issues can delay or derail the transaction. Addressing these factors early in the process can help you avoid roadblocks and maximize the value of the transaction.

Tax considerations and strategies

Liquidity events generally come with significant tax consequences, especially capital gains taxes. The good news is that strategic planning can help reduce tax burdens and preserve wealth. For example, you may be able to use the qualified small business stock (QSBS) exclusion⁷ or invest in Opportunity Zones⁸ to defer or eliminate capital gains taxes. As tax laws are complicated and change periodically, you may want to consider working with a financial expert who can help you navigate the transaction in the most tax-efficient manner.  

Estate and wealth planning before an event

Liquidity events – and the sudden increase in wealth – can magnify the need to establish or update key estate planning documents. Planning is key, as the right estate planning strategies can help protect assets, minimize taxes and transfer your wealth efficiently to your loved ones and favorite causes.

Managing liquidity after an event

A liquidity event can bring a significant financial windfall, but your next steps are as important as the event itself. Properly managing your newfound wealth includes building a diversified portfolio, protecting your assets (and identity), reviewing your estate documents regularly and committing to ongoing financial reviews with your wealth management team. These steps can help you manage risk, maintain stability and make the most of your financial future.

Diversification strategies

Keeping too much of your wealth in a single stock can expose you to significant market volatility and potential losses. Focus on building a diversified portfolio by spreading your wealth across and within different asset classes (e, g., stocks, bonds, real estate and alternative investments) to limit risk and protect against market downturns.

Liquidity management for long-term stability

After a liquidity event, set up an emergency fund so you have cash on hand for unexpected expenses. You may also want to explore tax-efficient investment options, such as donor-advised funds for charitable giving or trusts and tax-deferred accounts to preserve your wealth.

Avoiding common pitfalls

A liquidity event can be a major financial milestone, but you could experience costly mistakes without proper planning. Here are some common pitfalls to be mindful of:

• Ignoring tax planning: Failing to plan for capital gains and other taxes can lead to hefty liabilities.
• Overconcentration in one asset: Keeping too much wealth in company stock increases risk.
• Emotional decision making: Impulsive spending and rushed investment decisions can lead to poor diversification and erode wealth.
• Neglecting estate planning: You could face increased tax liabilities and legal problems (e.g., unintended asset distribution or probate issues) if you don’t establish or update wills, trusts and other estate planning documents.
• Skipping an emergency fund: Keeping liquid assets (i.e., assets you can convert to cash readily) ensures you have a backup plan during market downturns and other unplanned situations.
• Not seeking expert advice: Unless you’re a financial and tax pro yourself, it’s wise to call in the experts for help developing and implementing appropriate strategies to make the most of your wealth.

Working with financial professionals

You may want to consider working with a team of financial professionals, including financial advisors, tax strategists and estate planners. The right team can help you navigate the process, refine terms, maximize profits, minimize taxes and plan for your long-term goals – before and after a liquidity event – so you can make the most of your exit.

Bottom line

Preparation (or lack thereof) can make or break an IPO, merger or any other liquidity event. Remember, these are complicated and time-consuming transactions, requiring nuanced decisions. Poorly managed transactions can lead to significant tax liabilities, legal problems, operational disruptions and other hurdles. On the other hand, a well-planned liquidity event can be a life-changing financial milestone that opens the door to countless opportunities and long-term financial stability.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). Neither Summit Financial nor Conway Wealth Group provide tax or legal advice. 7785010.1
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1. U.S. Securities and Exchange Commission, “Going Public.” (September 2024)
2. Financial Industry Regulatory Authority, “How Mergers and Acquisitions Impact Investors.” (November 2024)
3. CAIS Group, “An Introduction to Private Equity Buyout.” (June 2023)
4. Carta, “Secondary Markets.” (July 2024)
5. Small Business Administration, “Close or Sell Your Business.” (March 2025)
6. Aspirant, “Navigating Liquidity Events: Key Insights for IPOs, M&As and Buyouts.” (November 2024)
7. The Tax Adviser, “Qualified Small Business Stock: Gray Areas in Estate Planning.” (April 2024)
8. Internal Revenue Service, “Opportunity Zones Frequently Asked Questions.” (November 2024)

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