Keeping More Of The Multiple
And What about Uncle Sam?
Mergers and acquisitions were strong in the information technology (IT) sector during 2018, with more deals completed in IT than B2C for the first time. Overall merger and acquisition results were driven by a continuous flow of megadeals, exceeding $3 trillion for 2018.1
Your vision and passion led you to build your company and have contributed to its success. When it comes time to sell some or all of your ownership interest, one of your goals will likely be to maximize the multiple. Proceeds generated by a sale may have to be shared with partners, such as a co-founder or venture capital investor. Like your partners, Uncle Sam will want his share of the gain, which is paid in the form of taxes.
With some advance planning, tech entrepreneurs may find they can increase the share of the multiple they keep. Yet for many entrepreneurs, the day-to-day demands of running a successful business take precedence over considerations like personal financial management. Spending some time considering your goals is simply good business for you and your family.
At Bank of America, your advisor helps you consider your personal long-term priorities in the context of an equity investment or business sale to help shape effective wealth management strategies. Based on these and other considerations, we work with you and your other advisors to design and execute individualized plans that balance business, family and personal needs, while striving to reduce the impact of income taxes on sales proceeds and transfer taxes on business values. To achieve this, Bank of America Private Bank employs a spectrum of sophisticated wealth strategies that can be tailored to your personal, wealth transfer and charitable goals. The most frequently used strategies include:
IT is the only industry sector to show year-over-year growth in the number of deals transacted each year going back to 2010.2
*As of 12/31/2018.
- Direct gifts to individuals or trusts
- Grantor retained annuity trusts (GRATs)
- Sale to intentionally defective grantor trusts (SIDGTs)
- Charitable remainder trusts
In addition, there are special income tax provisions for business owners that may enable you, to the extent feasible, to qualify for targeted tax benefits on the sale of stock if your ownership interest meets the definition of “qualified small business stock.” If so, you can:
- Exclude all or some of your gain, provided you’ve held your stock for more than five years and other conditions, (such as when you bought the stock, from whom you acquired it and the size of the company), are met.
- Roll over all or part of your gain, provided you reinvest the proceeds within 60 days of the sale in stock of another business that also meets the “qualified small business” requirements. Your original stock need only be held more than six months to be eligible to elect rollover benefits.
Your ownership interest may not be limited to shares you own outright, but may also include unexercised stock options. You need to remain aware of possible exercise strategies and consider mandatory tax withholding and income taxes.
It's no longer in vogue for tech founders to exit via an initial public offering (IPO). Just 5% of U.S. venture-backed exits in 2016 occurred via an IPO, down from a post-financial-crisis high of 11.6% in 2014. Conversely, 13.3% of venture-backed exits last year were via PE firms, the highest of any year since at least 2006.2
While much tax planning focuses on federal taxes, a comprehensive tax plan also should be mindful of state and local taxes. There may be planning strategies you might want to consider to help mitigate the impact of these other taxes.
Understanding the options open to you helps enable you to create a strategy that addresses the effect of taxes, helping you keep more of the multiple for yourself.
Over the last 10 years, private equity investment activity in the IT industry sector has grown, with most of it taking place in the software industry group. 3
As a tech entrepreneur, you have a lot on your plate. Applying these planning techniques to your situation can be complex given the different tax rules that come into play. As you build your company, we’re here to help you think through your various scenarios, with the understanding of the various planning techniques, to help you create your optimal plan. Please consult an advisor to start a conversation.
