What to Know on the Road to IPO

Copy of TWP_IPO_blog.png

You have spent years nurturing and developing your company to reach a certain level of financial success. What now? Are you content with maintaining the status quo of a “lifestyle” business or do you want to do more? Do you want to grow the company on your own? Do you have enough capital for expansion? What is your exit strategy? 

Some entrepreneurs want to pass their company on to their heirs, keeping it privately held. Others want to cash-out and sell to a larger company. 

Yet another popular option is for companies to “go public” through an initial public offering, or IPO. Over 490 companies went public in 2020, twice as many as 2019. If an IPO is your dream, there are some pros and cons to consider. 

The IPO process is typically long, costly, and grueling. It can also be quite lucrative.

What does the IPO timeline look like? 

It can take six months to a year to get through the IPO process. The steps involved include forming relationships with investment bankers, filing lengthy documents with the Securities Exchange Commission (SEC), and properly staffing the company with appropriate professionals such as a qualified CFO. Another step in the IPO process is known as a roadshow, which involves promoting the company to the public.

Before embarking on this journey, there are smart planning decisions that can save a small fortune in income taxes. Other important planning decisions can save future generations a bundle in estate taxes.

How does an IPO impact my company’s value?  

The value of the company’s shares prior to the IPO are often considerably less than the value after going public. If you believe your estate, post-IPO, will be worth more than $11.7 million (the current estate tax exemption amount which is subject to change), it is prudent to consider transferring wealth at the lower share value. The federal estate tax starts at 18% and goes up to 40% very quickly. For every $1 million over the estate tax exemption your estate will be assessed 40% in taxes at the federal level. (States have their own estate/inheritance tax laws and there are many states that have none.) 

Here are some additional considerations.

  1. You have the opportunity to transfer pre-IPO shares into family trusts at current values, removing those shares from your taxable estate. By putting lower-valued shares into a trust, you may avoid estate taxes on the appreciation of those shares.   

  2. You can also create trusts that have a charitable focus. Moving pre-IPO shares into a charitable trust can create a vehicle by which you have increased your ability to do philanthropic good in the areas that interest you. This strategy also decreases your overall taxable estate. 

  3. Another option to decrease your taxable estate is to consider making outright gifts of pre-IPO shares to close friends and family who will benefit from the IPO.

Once your company goes public there will be restrictions on selling your shares if you remain employed by the company. For this reason, you should consider what your cash needs are for one or two years and determine if you can sell shares at the IPO to cover those needs. After your immediate needs are covered, you can create a selling strategy over the ensuing years to gradually divest and diversify your holdings. Putting a plan in place will help avoid market reactions to your sales transactions.

Finally, but just as important, you should think about your personal and professional future. If you decide to stay with the company, what will your role be and how long will you remain? Are you mentally prepared for letting go of your company? Do you have a new adventure in mind , such as starting another company, spending time with family, traveling the world, or being more involved in your community? For some, it can be a bittersweet process to see your company flourish while realizing it is no longer entirely yours. Seeking the help of a professional family office may help you navigate these decisions and seize the opportunities ahead.