Personal Wealth Issues in an Initial Public Offering (IPO) - White Paper - Wealth and Investment Management
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June 2013
White Paper
Personal Wealth Issues in an
Initial Public Offering (IPO)
Wealth and Investment ManagementWealth and Investment Management
Personal Wealth Issues in an
Initial Public Offering (IPO)
For questions regarding this paper, When business owners are engaged in a transaction, attention
please contact your Investment
Representative or a member of the
typically focuses on the issues involving the business itself. In an
Wealth Advisory Team. IPO, matters of valuation, negotiation of terms, due diligence,
regulatory issues, and the miscellaneous problems that must be
resolved before closing dominate the agenda. These transactions
also create a number of issues and opportunities relating to the
personal wealth of the owner, and taking personal objectives into
account should be a fundamental part of any transaction. Proper
planning can accomplish key goals without slowing the
An IPO may be an transaction – and, in fact, may enhance overall transaction value.
important event in a
Often an IPO is called a “liquidity event,” as it creates a market for the owner’s shares. But
person’s lifetime, but the liquidity opportunity is not immediate. In most cases sales will not occur for months, if
important personal not years, after the IPO. However, planning in such cases remains an important part of the
process. The way in which personal and business interests intersect, and the optimal
considerations often structure, will vary with the form of the transaction and the goals of the owner. There is no
take a backseat in the standard approach that fits all scenarios. Successful results may come from integrating the
business strategy and deal structure with the owner’s personal considerations.
IPO process
Tax costs and long-term goals
“What matters is not what you make, it’s what you keep.” That cliché may be especially
applicable to business transactions, where the paper value of a deal can diminish
Planning in connection significantly before the business owner is actually able to capitalize on his/her wealth.
Planning in connection with a transaction may preserve value and greatly reduce the
with the transaction portion that income, gift, and estate taxes may take from the proceeds.
may preserve the
In all cases, early planning can pay dividends. Opportunities to reduce tax costs tend to
possible gains produced diminish as a deal progresses toward closing. One of the most frequent questions we
in the IPO by taking hear is: “When does it make sense to begin the planning process?” In virtually every case
the answer is: “Right now.”
advantage of tax-saving
opportunities and Although tax considerations may be the owner’s utmost priority, there should also be
due consideration for long-term personal and family goals. Many of the tools used in the
setting the stage for planning process involve trusts or other legal entities, which can last for years, and in
subsequent liquidity some cases lifetimes. How these entities will accomplish the family’s overall goals and
execute their personal values (including philanthropic goals) will be of great importance
and diversification*
to the family and the success of a wealth transfer strategy.1
1
Please see disclaimers at the back of this document. Diversification does not eliminate risks and there are no
guarantees of future liquidity. Investments may lose value. Neither Barclays in the U.S. nor its Wealth and
Investment Management employees in the U.S. render tax or legal advice. Please consult with your accountant,
tax advisor, and/or attorney for advice concerning your particular circumstances.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 1Wealth and Investment Management
In particular, many business owners wonder about the effect of leaving substantial wealth
to their children. Successful wealth transfer involves not just tax savings, but structuring
wealth so that it preserves family values. Additionally, preserving flexibility is key to a
successful strategy. Tying up control of an entity can impede the handling of the business,
or may make it difficult to respond to future tax changes.
The considerations involved in that decision are many and complex. But a number of
tools exist to accomplish the desired result; the difficult part is making the choices.
Funding appropriate Because wealth transfer issues involve important questions regarding the long-term
disposition of assets and the way in which the family will inherit wealth, wealth transfer
wealth transfer vehicles choices should not be taken lightly. Important decisions about how to transfer wealth to
early, while assets have heirs should not be made during an IPO road show. Once the owner develops a strategy,
the appropriate vehicles can be funded at almost any time. The timing of the transfers
a lower valuation, can
may, however, affect the success of the strategy. In addition to taking advantage of
help increase the valuation opportunities, beginning the process early provides the time to carefully
success of the strategy consider issues that could affect a family for decades to come.
Integrating personal planning with the transaction structure
In considering tax issues, owners should expect to pay income tax (which includes
capital gains) and an estate tax. The combination of those taxes (including state taxes)
can cut out a very significant amount of a family’s wealth. Depending on the type of
transaction involved, either or both of those tax systems may dictate what steps owners
take to maximize their wealth.
Valuation and the importance of planning early
Conceptually, gift and estate taxation is relatively simple. Transfers of wealth beyond
specified exemption amounts are taxed (currently at a maximum federal rate of 40%;
state taxes may also apply), and the tax is based on the value of the property
transferred, after taking certain exemptions into account. In the context of a business
transaction, the focus of much planning is to try to take advantage of attractive
valuation opportunities before the transaction, thus increasing the ability to leave
incremental wealth to family members. Often the ability to claim, and support, valuation
discounts is an integral part of a family’s wealth transfer strategy.
Exemption amounts
Individuals can transfer a portion of their wealth free of tax.2 An individual can transfer up
to $14,000 ($28,000 for a married couple) to any number of recipients each year without
incurring gift tax or reducing the lifetime exemption. In addition, he or she can transfer a
total of $5.25 million during his or her lifetime without incurring a gift tax. At death, in 2013
a total of $5.25 million per individual (reduced to the extent the decedent used his or her
$5.25 million lifetime exemption equivalent) can pass without tax. Many states, however,
have their own inheritance tax systems and different exemption amounts.
Because valuation of a business can be substantially lower before a transaction occurs,
that period offers a number of planning opportunities. It may be an opportune time to
consider exercising stock options, particularly where the exercise cost (and tax cost) is
2
May or may not include state and local taxes.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 2Wealth and Investment Management
low. It may also be a chance to transfer wealth to younger generations at a minimal
transfer tax cost. By using exemption amounts and “leveraged” gifting strategies
(discussed in more depth below) that effectively transfer appreciation to family
members, business owners can potentially transfer substantial wealth free of tax.
Owners need to be aware of some competing considerations. If taxes were the only
factor, obtaining the lowest possible value for the company would provide the optimal
result. But valuation is also critical in some other areas – including presenting the
company to investors or buyers on favorable terms. Particularly in the context of an
initial public offering, valuation considerations can be crucial. Pre-IPO companies have
long been sensitive to the need to make reasonable determinations of the company’s
value when granting stock options to employees. Granting a stock option, or another
type of equity award, at a discounted price gives rise to the so-called “cheap stock”
issue, causing the company to record additional compensation expense.
Companies also need to consider the impact of section 409A of the Internal Revenue
Code. Under proposed regulations, granting stock options at a discount to current
value is treated as a taxable event when the options vest. The employee would have
compensation income, and the company would be required to report the income and
withhold taxes. Under the regulations, if a company believes that it may go public
within a 12-month period, establishing the fair market value of common stock will be
possible only by getting an appraisal from an outside firm. Because the stakes are
increasingly high, the valuation issues are receiving a great deal of scrutiny from
investors and founders.
The decisions made regarding valuation have a direct impact on business owners. While
we think it is crucial to take advantage of favorable valuation opportunities, the owner
also needs to be aware of how valuation will affect the company in a number of areas.
Initial public offering
Valuation of the A corporate IPO presents some of the best, and most easily realized, opportunities to
accomplish personal goals. Through a number of techniques, many of which are not very
business and its equity complex, owners can implement an effective wealth transfer strategy and position
typically increases as the themselves for long-term investment management.
IPO nears, but attractive
Pre-IPO valuation
opportunities for gifting
Thoughtful wealth transfer planning can be done most effectively before an
may exist after the IPO becomes a definite possibility. However, even a relatively short time before an IPO,
transaction as well a company’s stock may be valued at a significant discount to the eventual IPO price.
Anecdotal evidence suggests that typically, a company expecting to go public in three
months might be discounted by about 30% from the public market price.3
Even after the IPO, corporate insiders will face a number of restrictions on sales of
shares, which will tend to further discount the fair market value of the stock. Early
planning is optimal, but those who find themselves late in the process may still find
opportunities.
3
FMV Opinions, Inc. The valuation figures in this paper are estimates based on general observations, not a
survey of specific transactions. The actual discount applicable to a given company will depend on facts relating
to that business and market conditions at the time.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 3Wealth and Investment Management
Wealth Transfer Planning
Owners who wish to transfer wealth to their family have a number of tools at their
disposal. All involve making gifts to younger generations, typically in trust. The gifts can
take a number of forms, depending on the family’s net worth, the amount to be
transferred, and the timing of the IPO.
Gifts of shares
Using the lifetime The simplest and most direct approach is to transfer shares to family members, typically
in trust for the benefit of younger beneficiaries or those not in a position to manage
exemption to transfer assets effectively. As long as the gift is within the applicable exemption equivalent
shares to family amounts, the gift will not cause a gift tax. Generally, the gift amount is measured by the
fair market value of stock transferred to the trust at the time of the gift.
members can be an
effective gifting tool to Using the exemption amounts to fund gifts can be an effective tool. The shares
themselves leave the owner’s estate, and any future appreciation in the stock accrues for
remove assets from the benefit of younger generations. Making gifts early, when the chance for future
one’s estate appreciation is greatest, can produce the biggest wealth transfer benefit. (Note: with the
filing of a gift tax return, starts the statute of limitations running, reducing the chance of
a valuation challenge by the IRS).
“Leveraged” gifts
Leveraged gifting aims Owners may not wish to use the $5.25 million exemption per donor that can pass free of
gift tax to cover pre-IPO gifts. They may already have used the credit, or wish to preserve
to shift the maximum it for other wealth transfer uses. In other situations, an owner’s net worth may be so
value from the donor’s large that a $5.25 million gift does not reduce the taxable estate by a meaningful
amount. In those situations, “leveraged” gifts can accomplish significant wealth transfer
taxable estate at the
without using exemption amounts.
smallest exemption
The concept of leveraged gifts is similar to the use of leverage in business transactions.
amount to their By retaining some portion of the gift, the owner reduces the amount transferred (the
beneficiaries “equity” value) and therefore his or her gift tax exposure. If the value of the property
increases, the “equity” value of the gift accrues for the benefit of family members. The
greater the appreciation, the more value transfers to younger generations. There are
several ways to accomplish such a transfer:
Grantor Retained Annuity Trusts (GRATs) – A GRAT is a trust to which the
owner transfers assets in exchange for an annuity payable over a specific period
of time.4 Frequently, the amount of the annuity is calculated so that the present
value of the annuity equals the value of the property placed in trust (and
therefore there is no use of the exemption or gift tax due), typically referred to as
a “zeroed-out GRAT.” The present value calculation is based on IRS prevailing
interest rates. If the stock transferred appreciates in excess of the annuity
amount, the excess remains for trust beneficiaries (typically children or other
family members of the donor) and has been transferred free of gift tax.
4
In some cases, shareholders use “family partnerships” to hold stock and other assets, and contribute units in
those partnerships to the GRAT. Use of family partnerships raises other issues and will require an annual
valuation to determine the amount payable under the annuity. Recently proposed legislation could affect
planning with partnerships, and families should seek expert advice before taking any actions.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 4Wealth and Investment Management
Sales to “defective” grantor trusts – In this transaction, a trust for the benefit of
family members, possibly including grandchildren or more remote descendants,
purchases shares from the owner for fair market value. As payment, the trust
issues the donor a note bearing a specified interest rate. The trust is structured as
a “defective” grantor trust, so that for income tax purposes the original
shareholder is still treated as owning the asset sold to the trust. Therefore, the
payment of interest and principal on the note is not taxable. As long as the
interest rate is at least equal to prevailing rates as published by the IRS, the
transaction is not a gift (because the trust has paid full market value for the
shares). If the stock appreciates beyond the debt payments (interest and
principal) owed to the owner, the excess remains in the trust. Typically, advisors
recommend that the “defective” grantor trust contain assets in addition to those
purchased (so that the trust has a meaningful equity value).
With both the “defective” grantor trust and the GRAT, the creator of the trust continues
to pay any income or capital gains taxes attributable to the trust. That allows the full
pretax value of trust assets to potentially build for beneficiaries, while depleting the
owner’s estate by the amount of the taxes paid. The “grantor trust” status can also be
terminated, in which case the trust (or beneficiaries), become responsible for income
taxes (rather than the grantor).
Either strategy has advantages and disadvantages, and the specific approach used will
depend on the situation and the judgment of the owner and his or her advisors. The pre-
IPO situation can, however, be an ideal time to implement a leveraged gifting strategy as
the potential increase in value from public market valuations can produce a very
significant transfer of wealth.
Stock option issues
The income tax Compensatory stock options may be a significant asset for owners and executives, and
they pose some particular issues in the context of an IPO. Although wealth transfer is a
implications for consideration in dealing with options, managing the income tax consequences of
stock options can be exercise and eventual liquidity is often the major issue facing option holders.
complex, but planning
“Nonqualified” options
opportunities may exist
When an executive exercises nonqualified options, the “spread” between the stock’s fair
market value and the exercise price is treated as compensation income. The spread will
be taxed at the employee’s highest marginal rate (currently 39.6% federally), and is also
subject to employment taxes and withholding. (The income will also appear on Form
W-2.) If the executive holds the stock acquired, his or her holding period starts the day
after the date of exercise. As with an outright stock purchase, any capital gain or loss
after the exercise of the option is treated as either short-term or long-term, depending
on the holding period.
Because the option exercise results in a significant cash outlay – payment of the exercise
price, as well as the income tax on the spread – many executives of public companies may
therefore choose to sell shares immediately after exercise. Although exercising and holding
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 5Wealth and Investment Management
stock for more than one year holds the promise of long-term capital gain treatment
(currently, a maximum federal tax rate of 20%), there are potential drawbacks:
The concentrated market risk involved
The opportunity cost of paying taxes
Paying the strike price out of other assets
These complexities may often lead to an immediate sale of the stock.
The situation may, however, be different for employees of private companies that are
considering an IPO. Because the public market valuation is typically higher than the
company’s value while privately held, there is likely to be significant appreciation in
connection with the IPO. Consequently, the potential benefits of a long-term capital gain
treatment may merit the cash outlay required to hold the stock. Also, strike prices for
private companies tend to be lower, placing less of a strain on assets an executive would
need to liquidate to pay the initial tax and purchase the stock.
Incentive stock options (ISOs)
Exercising ISOs may ISOs do not produce compensation income upon exercise. If the executive meets certain
holding period requirements then the entire gain on the position (the difference between
trigger the AMT the sale price and the option exercise price) is considered a long-term capital gain. But the
ISO benefit is treated as a “preference” item that can subject executives to the alternative
minimum tax (the “AMT”), which complicates the option planning process greatly.
ISO rules require that the employee sell stock more than two years after the date of the
option grant and one year after the date of exercise. Failure to observe those holding
period rules results in a “disqualifying disposition,” in which case the ISO is taxable as a
nonqualified option.
As with nonqualified options, the pre-transaction period may provide an opportunity to
plan with ISOs. Particularly in the case of an IPO, where the stock value may be expected
to increase significantly, exercising options before the transaction may enable investors
to acquire stock with minimal AMT or other tax consequences and to accelerate the time
when the investor is free to sell the stock. Investors need to be cautious in exercising
options, and should act only after receiving advice from their tax advisors on the
consequences of the exercise.
Wealth transfer considerations
Gifting stock options Gifting strategies with options involve a number of complexities not associated with outright
share ownership. One matter worth noting is that by their terms ISOs must be
can be complex, in part “nontransferable.” Accordingly, any gifting opportunities are limited to nonqualified options.
because of the income Even with nonqualified options, the terms of a given company’s option plan may prohibit
transfers of the option.
tax consequences to the
optionee following a It is important to remember that a gift of a nonqualified stock option does not change
income tax treatment. If an optionee transfers a stock option and the recipient exercises
transfer of the option it, the income associated with the exercise remains taxable to the donor. The IRS takes
the view that because the option grant is a form of compensation, the option holder
should not be able to shift resulting compensation income to another person. As a result,
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 6Wealth and Investment Management
the recipient would keep the entire pretax spread on the option, with the original owner
paying tax. That result may serve important estate planning goals – reducing the
owner’s estate while providing additional value to the younger generation that received
the gift. But it will be necessary to plan for the liquidity needed to pay resulting taxes.
Vesting requirements may also limit gifting opportunities with stock options. The IRS has
ruled that a gift of unvested property takes effect when the restrictions lapse, rather
than when the gift actually occurs. Because the option value may be substantially
greater at that later point, the amount of the gift could exceed applicable exemptions,
resulting in gift tax. Accordingly, option holders should take extreme care in considering
gifts of stock options.
Post-transaction issues – Balancing liquidity, tax cost, and legal
considerations
After an IPO or stock acquisition, the executive often holds stock or options with a value
greatly in excess of tax basis. The primary investment consideration should be how to
manage the equity position, which may represent the executive’s major financial asset.
The diversification and risk analysis has to take into consideration the legal constraints
on the sale, as well as the tax cost of selling.
Restrictions on sale after an IPO
Even after the underwriters’ lock-up period expires, executives are not necessarily free to
sell shares. Stock that is “restricted” under Rule 144 can be sold only in prescribed
amounts, which vary depending on the number of shares outstanding and the trading
volume. Corporate “insiders” – generally defined as officers, directors, or 10%
shareholders of the company – are also subject to the “short-swing profits” rule, which
forces sellers to disgorge profits from a sale occurring within six months of a purchase of
the stock. Executives who are subject to the company’s policy on insider trading will be
able to sell only in approved “window” periods. Due to these restrictions, executives will
need to structure liquidation strategies carefully.
10b5-1 plans – An important planning tool
10b5-1 plans allow Relying on window periods to sell shares can be problematic for executives. The market
prices available at the time may not be advantageous; there may be a number of sellers
insiders flexibility in at the time, depressing the market; or the executive may, through his activities at the
structuring stock sales company, be aware of nonpublic information that makes a sale impossible.
Selling shares under Rule 10b5-1 is an important tool that can help address those issues.
The executive adopts a selling program during a window period, at a time when he is not
in possession of material nonpublic information. The plan specifies a formula for selling
shares over a period of time, which can extend beyond the window period. As long as
subsequent sales follow the terms of the plan – which prescribes the number of shares
to be sold and the price – the sales meet the requirements of the securities laws.
Normally, the company adopts guidelines for 10b5-1 selling programs, and executives
who wish to take advantage of the provision should seek counsel regarding compliance
with the rule.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 7Wealth and Investment Management
Tax considerations
Managing the tax Selling at a profit comes at a price: taxes. Although the federal capital gains rate (20% on
most long-term gains) is relatively favorable, state tax on capital gains can greatly reduce
consequences of a sale the net proceeds from sale. In higher-tax states, the sale may even contribute to or
is a crucial component cause an AMT liability. Even under the current federal rate structure, managing the tax
consequences of sale is a crucial issue. Addressing tax consequences will be even more
of the IPO planning
important if federal tax rates increase. There are a few techniques that may enhance the
process tax treatment of a sale.
Qualified small business stock
If an executive’s equity in his business is qualified small business stock (“QSBS”), he or
she will benefit from a slightly lower capital gains tax (a benefit that could be reduced if
the executive is subject to the AMT). A potentially greater benefit arises from a
reinvestment of the proceeds, within 60 days, in another qualifying business. To the
extent that a qualifying rollover occurs, the original sale is not currently taxable.
Eventually the gain will be taxable upon a disposition of the new property, but the ability
to defer the tax may produce a significant benefit. As with all tax considerations,
investors need to consider the impact of state taxes.
Charitable remainder trusts
Charitable remainder trusts (“CRTs”) are one of the most commonly used tax deferral
techniques, particularly with investors who wish to combine charitable giving with tax-
deferred diversification. A CRT pays an annual distribution to a designated non-charitable
beneficiary, and at the end of the trust term any assets remaining in the trust go to a
named charity(ies) or to charities to be selected. The donor receives a charitable
donation deduction when he or she establishes the CRT, equal to the present value of
the charity’s expected remainder interest, subject to the usual income tax limitations on
charitable deductions. Potential income earned by the CRT is untaxed until it is
distributed to the current beneficiary. Consequently, the CRT allows holders to diversify
their holdings through a sale of shares by the CRT, to defer tax until receipt of payments
by the individual beneficiary, and to compound their investment returns by investing the
pretax value of the stock rather than the after-tax value.
CRTs can be flexible instruments. The donor has latitude in establishing the duration (up
to 20 years or for life/multiple lives) in the trust instrument, as well as the amount of
distributions, and the identity of the ultimate charitable beneficiary, including his or her
private foundation.
Exchange funds
Risks of investing in Exchange Funds An exchange fund is a partnership among several investors, each of whom contributes
– Investments may decline in value. shares to the fund. Each investor then owns a piece of the entire pool of assets, rather
Investments may not be subject to than just his or her initial stock. The contribution to the exchange fund is not a taxable
limited liquidity. There is always the event provided that certain conditions are met. One particular requirement imposed by
possibility of changes in tax code. tax law is that a certain portion of the exchange fund’s portfolio must consist of assets
other than stock, securities, or certain other categories of assets. Exchange funds will
often meet that requirement by holding real estate. The net effect of the transaction is to
provide a tax-deferred diversification of the investor’s holdings. The investment
performance of the fund depends on the various stocks contributed to the fund (as well
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 8Wealth and Investment Management
as the real estate or other assets). The “investment management” of the fund takes the
form of a decision on the part of the manager as to which stocks to accept, and which to
exclude, from the fund.
Some holders of newly public companies may find it difficult to take advantage of the
exchange fund option. The investment objective of some funds emphasizes large-
capitalization stocks, making it difficult for smaller companies to find entry into
acceptable funds.
There are a number of tax law restrictions imposed upon exchange funds. Generally
investors should be prepared to maintain the exchange fund investment for a seven-year
period, as distributions from the fund before then may be taxable. The funds are
generally open only to accredited investors, and exchanging stock for an interest in the
exchange fund may be subject to securities law reporting requirements. Those factors
indicate that exchange funds, if used at all, should make up a relatively small portion of
the investor’s portfolio. In appropriate circumstances, however, exchange funds can be a
useful tool in the overall diversification5 process.
MLPs – Special tax considerations
MLPs have unique A number of natural resource partnerships are available in the market. Although in many
respects the partnerships (generally known as Master Limited Partnerships or “MLPs”)
tax characteristics present the same issues as IPOs, they have some unique tax characteristics that present
that warrant special owners with special issues.
attention Although MLP units trade like shares of stock, the MLP is a “partnership” for tax
purposes. That could produce a number of benefits to investors, including the absence
of a corporate-level tax. It also means that a significant portion of potential distributions
goes untaxed, as depreciation and depletion deductions available to the MLP reduce the
taxable income from the investment. (Distributions from the MLP reduce the investor’s
tax basis in the entity, increasing the potential for gain recognition on an eventual
disposition of the unit.) Partnership status also means, however, that income from the
investment is treated as “debt-financed” if the MLP uses leverage in its capital structure,
Risks of investing in MLPs –
and that characteristic has several implications.
MLPs are an interest rate-sensitive
investment; MLPs are impacted by Most important, “debt-financed income” is taxable, even to exempt organizations, as
the supply and demand of the unrelated business taxable income (“UBTI”). For an IRA or tax-exempt foundation,
products they transport or store; income from the investment is taxable.6 It compares unfavorably, in that respect, with
MLPs require access to the capital income from other investments that is untaxed. In the case of CRTs, UBTI is taxable at a
markets to fund growth spending; 100% rate – in other words, the CRT forfeits the entire amount. As a result, CRTs are not
MLPs generally have less liquidity advisable as diversification or deferred giving vehicles for MLP owners.
than most common stocks due to
high retail ownership and tax More generally, the structure of a particular MLP may give rise to specific issues. Because
advantages of owning the positions of the tax advantages of MLP status to outside investors, going public as an MLP may
long term and MLP cash flows and enhance enterprise value and the proceeds available from an IPO. But if the business is
unit prices could be adversely affected housed in a corporate entity before the transaction, the owner may face some significant
by changes to federal tax policy. corporate tax exposure as he or she becomes liquid. Effectively, gains from the MLP are
5
Diversification does not protect against loss.
6
Tax arises if the UBTI exceeds $1,000 for the year.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 9Wealth and Investment Management
taxed twice – once at the corporate level and again as distributions come to the owner
individually. A significant part of the planning is to reduce the tax burden from the
liquidity event, which may affect the overall structure of the offering.
Summary
The optimal time for In many ways an IPO is the culmination of a long process of building a business, and
represents a milestone achievement for the business owner and the corporate team. The
wealth transfer planning effort needed to take the company public can become all-encompassing, and the
is far in advance of the pressure of events around the time of the offering can crowd out other considerations.
Time constraints are among the reasons why early planning is necessary. The optimal
transaction
time for wealth transfer planning is far in advance of the transaction, even as early as
inception of the business for founders. But the pre-transaction period may offer a
number of opportunities to implement family goals, which may not be available to the
same extent after the offering.
Several factors are critical when thinking about personal goals:
Investment bankers, wealth advisors, and the owner’s tax and legal advisors should
coordinate closely. Transaction details will often affect the personal planning
strategy; similarly, steps taken by the individual owner may need to be reflected in
document disclosures or deal structure.
Formulating a general sense of long-term goals (e.g., allocating wealth between
family and charitable beneficiaries) can help facilitate an effective overall wealth
transfer strategy.
Use of trust vehicles and other techniques can be a very efficient way to implement
the owner’s personal strategy.
Each strategy involves a number of advantages and potential downsides, which
owners should understand before implementing a planning technique.
Personal Wealth Issues in an Initial Public Offering (IPO) June 2013 10Disclaimer Options – Prior to buying or selling an option, please read the Characteristics & Risks of Standardized Options available at: http://www.optionsclearing.com/about/publications/character-risks.jsp. Options, structured derivative products and futures are not suitable for all investors as the inherent risk may expose investors to rapid and substantial losses. Trading in these instruments is risky and may be appropriate only for sophisticated investors. Various theoretical explanations of the risks associated with these instruments have been published. The value of the investments which may be stated in this document, and the income from them, may fall as well as rise. Past performance of investments is no guide to future performance. You may not get back the amount of capital you invest. Any income projections and yields are estimated and are included for indication only. Further, any valuations given in this document may not accurately reflect the values at which investments may actually be bought or sold and no allowance has been made for taxation. Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses. Diversification does not protect against loss. Investing in securities involves a certain amount of risk. You are urged to review all prospectuses and other offering information prior to investing. This material is provided by Barclays for information purposes only, and does not constitute tax advice. Please consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances. IRS Circular 230 Disclosure: BCI and its affiliates do not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. “Barclays” refers to any company in the Barclays PLC group of companies. Barclays offers wealth management products and services to its clients through Barclays Bank PLC (“BBPLC”) that functions in the United States through Barclays Capital Inc. (“BCI”), an affiliate of BBPLC. BCI is a registered broker dealer and investment adviser, regulated by the U.S. Securities and Exchange Commission, with offices at 200 Park Avenue, New York, New York 10166. Member FINRA and SIPC. Barclays Bank PLC is registered in England and authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP. BCI and/or its affiliates may make a market or deal as Principal in the securities mentioned in this document or in options or other derivatives based thereon. One or more directors, officers and/or employees of BCI or its affiliates may be a director of the issuer of the securities mentioned in this document. BCI or its affiliates may have managed or co-managed a public offering of securities within the prior three years for any issuer mentioned in this document. ©Copyright 2013.
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