What is a Liquidity Event? – Precautions, Types, and More
Conceptually, a liquidity event allows the initial investors of a company to dispose of it, either partially or totally, through the sale of the company, its merger or its spin-off.
What are the Precautions to be Take?
When we talk about a liquidity event, it is essential to be careful, representing a significant change. In addition to the direct impacts, such as the transfer of ownership of the business, there are indirect impacts, such as market value, customer perception and shareholder satisfaction. All these impacts have their relative importance and should not be neglect during the process. Below are a few points to note with caution:
Ensure the secrecy of the operation, from the first approach to the completion of the sale; Check if the person interested in the purchase has the financial capacity for the process and also if there is a fit between the business and the buyer;
It is essential to understand the deadlines for sale and the conditions under which it will be carried out; In the case of a partial sale, it is also vital to understand whether there will be alignment between you and the new partner.
What are the Main Types of Liquidity Event?
It is essential to know the main types of liquidity events. As each involves different situations and care, especially in the way the sales process is manage. Check it out below:
Sale of the Company
In the event of liquidity due to the sale of the company, whether total or partial, the entrepreneur transfers the company’s ownership to third parties, impacting administrative, operational and functional processes. It is usually the most common type of liquidity event. In which the entrepreneur may or may not withdraw from the company’s operations;
it is also possible that the liquidity event arises from the union between companies, giving rise to a new company, which starts operating the business after the deal is conclude;
Total or Partial Spin-Off
contrary to the merger process, the spin-off consists of the separation, in whole or in part, of a corporation into two or more companies. New or existing, by transferring the assets of the spun-off company. In a total spin-off, the spun-off company ceases to exist, while in a partial result, it continues to exist but with altered capital.
Tips for Preparing for a Liquidity Event
Now that you take a sound understanding of a liquidity event and its main types, opportunities, and consequences, it is interesting to know how to prepare for it.
1. Study and Plan the Decision to Sell the Company
The sale of a company is a long, demanding process that can be arduous, both for those who are selling and for those who are part of the company. Such as employees, suppliers and customers, among others.
In addition, depending on the type of sale and the conditions of the negotiation. This is also a decision that can completely change the personal and professional routine of the seller, which can be traumatic if you are not fully satisfied with the change.
Therefore, it is vital to study and plan the sale decision. Seek to understand its direct and indirect impacts, the changes resulting from this decision. And organize yourself so that the company’s liquidity event runs satisfactorily.
2. Perform the Assessment of the Company’s Sale Value
Another critical point is to carefully assess the company’s sale value before opening the search for a buyer or accepting an offer to sell. This process, known by the English expression valuation, analyzes the current market scenario of your company, its return potential. And its positioning vis-à-vis competitors, among other factors.
It is interesting to have a professional specialize in evaluating the value of companies so that the analysis is carried out transparently and objectively. It is intend to ensure that a deal is not sought outside the market reality, either for more or less.
3. Understand the Tax and Accounting Effects of the Sale
Whether total or partial, a liquidity event generates legal, tax and accounting effects, which must be fully understood before the sale. For example, it remains important to understand the charges arising from the sale. In addition, the taxes levied on the generated equity. The legal procedures for transferring ownership and the bookkeeping processes involved in the sale.
4. Count on Specialized Support
Finally, as we have already said, specialized support for a company’s liquidity event can be fundamental. Especially to avoid later problems and ensure that all those involved have their rights guaranteed and respected.
As you can see, a liquidity event involves a series of factors that must be carefully analyze. As it directly impacts the company’s assets and the company’s financial health, the process must be manage responsibly.
Therefore, it is valid to inform yourself about all the procedures necessary for the sale of the company, either in whole or in part. In addition to having specialized legal, accounting, tax and tax support.
What did you think about better understanding. What a liquidity event is, knowing the main precautions and consequences of this process, the main types of liquidity event, and our tips to prepare for it? Then, if you liked it, share the knowledge on your social networks!
A liquidity event is use in corporate finance to describe many different occasions. The two main events that fall under the liquidity event framework are purchasing a corporation and an initial public offering.