A tender offer, sometimes called a buyback, is a type of secondary transaction where existing holders of private company shares sell them back to the company or to outside investors. Usually, a tender offer applies only to a limited number of available shares.
Since tender offers are only open to employee shareholders, they may help to foster a culture of ownership while encouraging employee retention. This may make them momentous events in a private company’s lifecycle.
Yet sometimes, one of the most critical times in the employee tender offer process is what comes immediately after it. With cash or shares in hand, your employees may be left with questions such as: How will I be taxed on the proceeds of my sale? What happens to the rest of my holdings? What should I do with the money I receive from the tender offer?
Ideally, employees will consult a tax or financial advisor prior to participating in a tender offer to get answers to these questions and more. After all, tender offers can be complex and individual tax and financial situations can change significantly once employees actually receive their proceeds. That said, employers may have a role to play in helping employees answer some of their questions about tender offers in a quest to promote a healthy equity ownership culture.
Calculating the Tax Bill
A question that commonly arises in the wake of a tender offer relates to its tax implications. While the tax implications of various equity holdings are very complex, at the completion of the tender offer, every employee should have a clear understanding of how their proceeds will be taxed (as ordinary income, or short- or long-term capital gains taxes), whether they will need to pay an Alternative Minimum Tax (AMT) and if the proceeds from their sale push them into a higher marginal tax bracket.
One way to convey this information at a high level is by preparing an information package to share with employees. At the same time, it may be a good idea to bring in a tax or financial professional to communicate all of this to employees prior to the tender offer. If your employees still have questions after that, consider providing additional resources or access to a Certified Professional Accountant who can help them map out their tax obligations and complete the forms necessary to report the sale or exchange of capital assets on their tax returns. Tax and financial professionals can also walk employees through options to potentially lower their overall tax bill, such as through charitable giving or leveraged gifting to a family member.
