Mergers and acquisitions were strong in the information technology (IT) sector during 2016, with deal activity totaling $426 billion across 3,060 transactions. The median and average IT deal size also grew in 2016.1

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 U.S. Trust, 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, U.S. Trust employs a spectrum of sophisticated wealth planning strategies that can be tailored to your personal, wealth transfer and charitable goals. The most frequently used strategies include:

  • 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.

As a tech entrepreneur, you have a lot on your plate and 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 are 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 a U.S. Trust® advisor or wealth strategist to start a conversation.

 


1 2016 Annual M&A Report, PitchBook, 2017.

2 Pitchbook.com, March 31, 2017.

Neither U.S. Trust nor any of its affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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