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Best way to handle an IPO of a family company
Posted on 4/13/15 at 11:51 am
Posted on 4/13/15 at 11:51 am
Family friend is dealing with this scenario (I wish it were me...):
This person has a substantial portion of her estate tied up in shares of what used to be a family-owned business. The business has grown substantially in the last 20-30 years, and she has no personal involvement in running it.
Let's say her total shares are worth about $5-$10 million; some shares are owned by an LLC and some are owned as an individual, not sure of the ratio. A large part of this value is unrealized gain. My guess is that these interests make up maybe half of her total net worth.
It looks like the company will be going public in the not-to-distant future.
For various reasons, she has been ok with that much of her total estate being tied into a single company; however, if the IPO goes through, she is concerned about being that heavily invested in a single publicly traded company, and also concerned about capital gains from diversifying.
What would the Money Board do?
(To be clear, she's definitely going to be talking to financial professionals about this; I just thought it was an interesting scenario)
This person has a substantial portion of her estate tied up in shares of what used to be a family-owned business. The business has grown substantially in the last 20-30 years, and she has no personal involvement in running it.
Let's say her total shares are worth about $5-$10 million; some shares are owned by an LLC and some are owned as an individual, not sure of the ratio. A large part of this value is unrealized gain. My guess is that these interests make up maybe half of her total net worth.
It looks like the company will be going public in the not-to-distant future.
For various reasons, she has been ok with that much of her total estate being tied into a single company; however, if the IPO goes through, she is concerned about being that heavily invested in a single publicly traded company, and also concerned about capital gains from diversifying.
What would the Money Board do?
(To be clear, she's definitely going to be talking to financial professionals about this; I just thought it was an interesting scenario)
3
Posted on 4/13/15 at 11:58 am to studentsect
quote:
What would the Money Board do?
Impregnate her.
Posted on 4/13/15 at 12:16 pm to RadTiger
let her impregnate me
Posted on 4/13/15 at 12:23 pm to RadTiger
Do a swap with the compAny stock and the S&P 500, or jut put an option collar around it.
She will probably be restricted from selling for a while and this strategy minimizes capital gains.
She will probably be restricted from selling for a while and this strategy minimizes capital gains.
Posted on 4/13/15 at 4:36 pm to studentsect
quote:
, she is concerned about being that heavily invested in a single publicly traded company, and also concerned about capital gains from diversifying.
Well, she is going to have to get over the capital gains concern, she is paying either way.
My advice would be to sell it gradually, although it would take years of exposure to back out of the position completely without getting into the highest cap gains rate bracket.
In short, this is one of those situations that you just have to be happy you have that much in gains to report, and prepare to bend over.
Take a large chunk of gains asap, eat the extra taxes, invest in index and pull out the remainder over time.
Eta. Being stuck in one position for the large majority of your portfolio really sucks, especially if it is a brand new company (IPO). Would be best to just get out of it and not be subject to all the volatility.
This post was edited on 4/13/15 at 4:45 pm
Posted on 4/13/15 at 7:55 pm to studentsect
If the family business is going public, then there should have been lawyers, accountants and investment bankers out the wazoo involved in providing the family advice. There isn't a single Money Board poster who can possibly provide better answers than the lawyers, accountants and investment bankers who have insider knowledge.
That being said, your family friend shouldn't have to worry too much about income taxes. Whatever basis she has in her ownership will transfer to the shares of stock she receives. A bigger worry should be estate taxes. And if she hasn't had discussions with her financial advisors about doing some sort of estate freeze before the business goes public, then her advisors aren't worth spit.
That being said, your family friend shouldn't have to worry too much about income taxes. Whatever basis she has in her ownership will transfer to the shares of stock she receives. A bigger worry should be estate taxes. And if she hasn't had discussions with her financial advisors about doing some sort of estate freeze before the business goes public, then her advisors aren't worth spit.
Posted on 4/14/15 at 9:12 am to Poodlebrain
quote:
If the family business is going public, then there should have been lawyers, accountants and investment bankers out the wazoo involved in providing the family advice. There isn't a single Money Board poster who can possibly provide better answers than the lawyers, accountants and investment bankers who have insider knowledge.
That being said, your family friend shouldn't have to worry too much about income taxes. Whatever basis she has in her ownership will transfer to the shares of stock she receives. A bigger worry should be estate taxes. And if she hasn't had discussions with her financial advisors about doing some sort of estate freeze before the business goes public, then her advisors aren't worth spit.
Thanks for the comments.
To clarify, they've had accountants/lawyers handling the estate planning for a long time now and will have them heavily involved going forward, I'm using "family business" somewhat loosely, as there are hundreds if not thousands of shareholders at this point, and the IPO talk isn't a sure thing at this point.
What has changed is that it was always assumed that these shares would just stay in the family, so while they've always factored into her estate planning, she hadn't put much thought into implications of selling before her death; if they become shares in a publicly traded company she is concerned about not being diversified enough.
What I was looking for with this post was just to get a general idea about what professionals will be suggesting so that the family can be a little more prepared going into meetings with financial advisors (and so that I can sound like I vaguely know what I'm talking about).
Posted on 4/14/15 at 9:31 am to studentsect
The likelihood is that your friend could not sell her shares today for close to what she will be able to sell them for if the company goes public. She can take all sorts of discounts, lack of marketability and/or lack of control, against the value for estate/gift tax purposes if she transfers them to some sort of split interest trust, a GRAT for example.
It is possible she may not be able to sell any post-IPO shares for a specified period of time, but when she does sell shares she will have long-term capital gains from the sale. There is no getting around that if she wants to diversify after an IPO.
It is possible she may not be able to sell any post-IPO shares for a specified period of time, but when she does sell shares she will have long-term capital gains from the sale. There is no getting around that if she wants to diversify after an IPO.
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