What Is Succession Liquidity?

Assess the Financial Structure

Every family has a different financial structure, and the first step is to understand the parts that are relevant to the liquidity issue the founder wants to address.

The assessment does not necessarily need to cover the family’s entire wealth.

If the founder wants to focus on Inheritance Tax, bank facilities, business continuity, or another specific issue, the assessment can be limited to the assets, liabilities, ownership arrangements and financial obligations connected to that issue.

If the founder wants a broader view, the assessment can expand accordingly.

Within the agreed scope, we look at how the relevant assets and obligations are structured, where liquidity already exists, where value is held in less liquid assets, and how quickly that value can be accessed.

This gives us a clear financial picture of the specific issue before moving to the next step: defining the liquidity need.

Quantify the Liquidity Need

Understanding the financial structure tells us where value is held.

The next step is to determine how much liquidity may actually be required during succession.

That requirement can come from different sources: Inheritance Tax, banking obligations, business continuity, buyout requirements, family equalization, or other financial needs within the agreed scope.

We identify the relevant obligations, when they may arise, and how much liquidity may be required to meet them.

Timing is especially important.

A family may have substantial wealth, but if the required liquidity is needed before assets can be accessed, sold, refinanced or reorganized, a liquidity gap may still exist.

The objective is therefore not only to calculate an amount.

It is to understand the amount, the timing, and the purpose of the liquidity requirement.

In some situations, the available information allows the requirement to be quantified relatively clearly.

In others, future values, tax exposure, financing conditions or business circumstances may still be uncertain.

In those cases, the requirement may be assessed through ranges or different scenarios rather than a single fixed number.

This gives the founder a clearer picture of the potential liquidity exposure and provides the financial basis for the next stages of the strategy.

Design the Liquidity Strategy

Once the liquidity requirement has been identified, quantified and aligned with the relevant structure, the next step is to design the funding strategy.

The starting point is the need itself: how much liquidity may be required, when it may be needed, and what it needs to fund.

In most of the situations we work on, the founder does not need to hold the full future liquidity requirement in cash from today.

Instead, a measured capital commitment during the founder’s lifetime can be used to create a significantly larger pool of dedicated liquidity that becomes available when succession occurs.

Advanced life insurance instruments can play an important role in creating that future liquidity.

Depending on the structure, the founder may fund the strategy directly through premiums, or bank financing may be used to support part of the funding requirement where appropriate and available.

The purpose is to reduce the amount of capital the founder needs to commit directly today while still building a meaningful pool of future succession liquidity.

The exact structure depends on the founder’s circumstances, the size and timing of the liquidity requirement, underwriting, product terms, financing conditions and the liquidity already available.

The solution therefore does not start with a predetermined product.

The product and the financing structure, where financing is used, are selected after the actual liquidity requirement has been defined.

The objective is to use capital efficiently today while creating dedicated liquidity for the future, allowing a larger part of the founder’s wealth to remain invested in businesses, real estate and other productive assets.

Ultimately, the goal is to make sufficient liquidity available when succession occurs without requiring the founder to reserve the full amount in cash throughout his lifetime.

Coordinate With Existing Advisers

Most founders with substantial wealth already have advisers responsible for different parts of their financial and ownership structure.

Legal advisers may be responsible for ownership and succession arrangements. Tax advisers may assess the applicable tax position. Banks may manage financing and credit relationships. Trustees, family offices and other specialists may also have defined roles.

Riches & Guards does not replace these advisers.

Our role is focused on the liquidity dimension of succession.

Once the liquidity need has been identified, and with the founder’s approval, we coordinate the relevant financial requirements with the advisers involved in the agreed scope.

This helps us understand how the liquidity strategy needs to interact with the existing legal, tax, ownership and banking arrangements.

In some situations, the advisers may identify requirements or constraints that affect the amount, timing or structure of the liquidity solution.

In other situations, the liquidity analysis may highlight a funding issue that the founder wants the advisers to consider within their own areas of responsibility.

The objective is not to redesign the founder’s entire structure.

The objective is to make sure the liquidity strategy can work alongside the arrangements already in place and support the founder’s succession objectives from a financial perspective.