November 2015 Portfolio principles Wealth Management Research Planning for liquidity events From entrepreneur to wealth manager A comprehensive look at the professional, personal and financial challenges of business sales. Contents Editorial 3 Publisher UBS AG, Wealth Management Research, P.O. Box, CH-8098 Zurich Chapter 1 Defining a liquidity event 4 This report has been prepared by UBS AG. Please see important disclaimer at the end of the document. Past performance is not Chapter 2 an indication of future returns. The personal aspects of a liquidity event 17 Chief Economist and Global Head Wealth Management Research Chapter 3 Dr. Andreas Höfert The investment implications of a liquidity event 34 Editor-in-chief Pierre Weill Chapter 4 Email: [email protected] From entrepreneur to wealth manager 46 Editors Andrew DeBoo, Anna Focà Glossary 51 This issue of Portfolio principles is an update of the Key insights “Planning Bibliography 52 for liquidity events” (January 2009/ March 2010). For details see bibliography on page 52. Project management Sita Chavali*, Reda Mouhid Desktop dl-wmr-desktop Cover picture www.prisma-dia.ch This publication was first produced in 2012, while the world was still in Translation a recovery phase following the 2008 financial crisis. While the overall CLS Communication, Basel, Switzerland message in this booklet entitled "Planning for Liquidity Events Printer AlphaGraphics, United Kingdom From Entrepreneur to Wealth Manager" is also appropriate Languages today, we appreciate that some of the examples given may seem Published in English and German dated. We believe there is great value in discussing these principles and Contact [email protected] how, for example, they align with your goals and objectives today and UBS homepage: www.ubs.com in the future and we welcome the opportunity to be part of this To order, please contact your UBS client important conversation with you. advisor / financial advisor. © UBS AG 2012 * We would like to thank Sita L. Chavali, an employee of Cognizant Group, for UBS WMR’s Portfolio principles provides investment recommendations her assistance in preparing this research report. Cognizant staff provide research and guidance for sophisticated investors, with a focus on the unique support services to UBS. issues related to managing significant personal wealth. As such, this report is not suitable for all investors. Please consult your advisor if you This report has been prepared by have any questions as to whether this report is appropriate for you. UBS Financial Services Inc. (“UBSFS”) and UBS AG. 2 Portfolio principles – November 2015 Editorial Dear Reader, Is there a "perfect time" to write a report about This report is not about mergers and acquisitions or IPOs. planning for liquidity events? It focuses on the challenges that must be met before and after the sale of a business. It shows how the Recent years, following the debt crisis of 2008, have professional, personal and financial dimensions are resulted in many business owners putting their plans on inter-linked, and how they can be integrated for the best hold – awaiting better times and better valuations. But results. While we do provide some detailed guidance on then, even as the market environment stabilized, fear the professional dimension in Chapter 1, the personal remained on the horizon and many business owners implications in Chapter 2 and the financial consequences continued to ask the question: Is now the "perfect in Chapter 3, we focus throughout on the integrated time"? Economic conditions, market timing and risk process. Finally, we offer an overview to guide the years tolerance aside, it's never too soon to plan for the directly before and after a liquidity event in Chapter 4. inevitable, to best prepare for the future and to ensure that you create and realize the highest value for your While you may not plan to sell your business today, it is efforts. certainly wise to begin thinking about that day. Careful planning now will allow you to take advantage of For one thing, this is a topic that cannot wait for more opportunities promptly when they materialize. With a favorable market circumstances. About 53% of baby- plan in place, you will be ready to act when you want boomer business owners in the US intend to exit their to. We sincerely hope that this report provides you with businesses in the next 10 years, but only one in 10 have guidance, and inspiration, for any liquidity event. prepared a formal plan. Two-thirds of owners over 60 years old have no exit plan at all. More than half of all entrepreneurs want to sell their company to a third party, 20% want to sell it to the managers and only 1 14% assume they will hand it over to a family member. Planning is the key word in this report. We cannot emphasize enough that a successful liquidity event like Dave Mason, CIM®, FCSI® the sale of a business needs careful planning. It is a Director complex process that requires management across three Senior Private Wealth Manager dimensions. The first is the professional dimension: the actual sale, merger or IPO of a business. Most experts UBS Bank (Canada) and business owners focus predominantly on this UBS Investment Management Canada Inc. dimension when planning for liquidity events. However, 999 West Hastings Street there is also the personal dimension of a liquidity event, Suite 650, Vancouver, BC V6C 2W2 which can often be even more important than the 604-331-4562 professional dimension. The emotional challenges of giving up control over a privately owned business and transitioning into a new role as “ex-entrepreneur”– whatever this new role may look like – requires reflection about one’s identity and about other family members. Finally, there is a financial or investment decision. A liquidity event can turn the merely wealthy into the very rich almost overnight. This could create both emotional and financial challenges. Managing very large amounts of money requires different skill sets than managing a successful business. 1 White Horse Advisors study, 2008 Portfolio principles – November 2015 3 Chapter 1 Defining a liquidity event Defining a liquidity event Highlights of Chapter 1 Most liquidity events are composed of both "conversion" and "transition" features. Conversion refers to the conversion of one form of wealth – an illiquid asset, a business, a building – into a liquid form such as cash or marketable securities. After conversion, there is a need to reinvest the cash. The conversion is a financial event. Transition is a less appreciated aspect of liquidity events. Almost all transitions have very personal implications for individuals and their families and can lead to substantial changes in their situations. Usually, transitions result in greater wealth, and managing significant investments becomes a focus. Introduction focus on the latest merger and acquisition (M&A) If you reach the point where you are facing a primary technique. Only by using a holistic approach that breaks liquidity event, usually the sale of a business, you have a liquidity event into its component parts and seeks to already defied enormous odds. Reaching a point where understand the nature and role that each play in the you can attract a buyer, or perhaps even multiple ultimate process can an owner, and his or her family, buyers, and command a premium price puts you into manage the event in its totality and with the necessary even more rarefied social categories: successful regard for their unique situation, personal entrepreneur, prominent citizen, wealthy family. characteristics, needs and goals. However, among these accolades themselves and This chapter will look at the first of what are, in our view, intertwined within the process of selling a successful the three critical dimensions of a liquidity event. The first is business, lie complex and sometimes easily over- looked the professional context, which is the business itself. The issues. One of the most overlooked problems that second dimension, discussed in Chapter 2, is the personal, successful business owners may face is the assumption which includes the situation of the owner and the family that their success implies a commensurate level of in relation to the business and liquidity event. Third is the ability in all other spheres of life. financial or investment dimension, covered in Chapter 3. Unfortunately, experience with wealthy families has Defining a liquidity event shown that conflicts within a family are often the root Any event, particularly a transaction, that leaves cause of major financial disruptions later on. An someone with a large amount of cash, is a liquidity exaggerated focus on intricate investment strategies event. Depending upon the scale of wealth involved, may leave an investor exposed to a wide range of risks these transactions may involve a high degree of that could have been easily uncovered and hedged. complexity both financially and personally. There are three primary types of liquidity events: Selling a business is perhaps one of the most complex events a person can go through. The personally owned 1) Sale of a business or liquidation of a position in a firm is already a multifaceted entity which involves more business or partnership. This report will focus on a than just a business, but also a complex and unique primary liquidity event, the sale or partial sale of a owner and any level of family and outside involvements business. – sibling partnerships, first, second, third or even longer 2) Sale or disposition of a concentrated or illiquid asset. generational structures, in-laws, and finally outside The sale of concentrated stock positions, real estate or partners as well. Yet a fundamental approach to liquidity other holdings may also amount to a liquidity event, events is also as important – if not more so – than a usually when the asset in question represents a primary or majority share of net worth.