Going public can be one of the biggest changes for clients who have their own business. The idea of an IPO at any given time can be overwhelming, but especially today, as hundreds of companies wait for better market conditions. But, are there actions that can be taken now while we wait for the resurgence of IPO activity? The answer is always yes: While we have no crystal ball on when the market may start to look more attractive for IPOs, there’s always room for proactivity. The IPO preparation process should start at least one year in advance.
If you have ultra-high-net-worth (UHNW) clients thinking about taking their businesses public, you can help play a key role in the preparation process. Use this time to suggest they approach their growth opportunity with a detailed plan and ample resources, so that they have a better chance at success when the market picks back up.
Building a Team
IPOs require a host of “teammates.” Surrounding your client with the right professionals is a critical first step. An IPO team will often consist of a fiduciary financial advisor, a CPA/tax advisor, an estate planning attorney, and can also include underwriters, investment strategists, broker/dealers, valuation experts, business brokers, or family consultants, depending on your client’s needs. If you have a strong relationship with your client, you might be able to assist in building out the team to ensure all needs are met.
All of the professionals on the team will work proactively together to support the client’s transition. Surrounding the client with the right professionals can be just as important as making the actual decisions. Not only should this team have experience with IPOs and M&As, but they should also have a high level of emotional intelligence. If this is a client’s first IPO, they may be facing sophisticated personal wealth planning for the first time, and the choices your team makes can impact their way of life. You and the rest of the team are there to help prevent regrets, reduce uncertainty and help give them the confidence they need to make the right decisions.
Getting Organized
A good plan starts with a foundation of good information, including gathering:
- Personal estate planning documents;
- Corporate plan documents;
- Human resource and benefits documents; and
- A summary of the company assets, organized by equity type.
You and the rest of the advisory team can take this time to help a client get all relevant documents together, understand how the above assets will be impacted by the IPO, and review lockup periods and restrictions on liquidity around the potential transaction. Depending on the asset, summarize their key terms, including the vesting schedule, exercise prices, expiration dates, double triggers and, most importantly, how they are treated for tax purposes.
For example, incentive stock options (ISOs) may have minimum tax credits that can offset taxes if the client exercised options in the past. Qualified small business stock (QSBS) can be in either short-term or long-term capital gain positions, and you will need to know information such as their adjusted cost basis, the day they were executed, and whether they met their five-year holding requirement.
Setting Goals
While it’s important to take this time to make technical preparations, it’s also important to guide your client through discovery and reflection during the goal-setting process. Help your client conceptualize what they want and need from this transaction—for themselves, their family and their community. Rather than fixating on a number, you can begin to define what success may look like and set a framework for measuring against benchmarks throughout the process.
An understanding of a client’s personal and business values comes from asking the right (and potentially uncomfortable) questions: Who will their decisions affect (partners, employees, family) and how? How does the client want to support their family? Should they transfer assets to them now, later or at all? Will they want to be involved in the business after the IPO? How might they want to support the community? These are not light questions—and may take a while to find answers to—but those answers will help them create a list of priorities to guide future decision-making.
Planning and (Eventually) Executing
An IPO or business-related liquidity event can result in many new concerns and life changes. This is why it’s so important to be proactive and outline a comprehensive, multiyear plan that sets reasonable expectations, prevents unnecessary family tension and provides needed leadership to the business during the event. A plan is never complete until the client communicates their thoughts, goals and expectations to key family members, decision-makers and personal advisors. With this openness, you will be more likely to create an optimal outcome for all those involved, and make room for plans to change as the client and their business evolves.
The process of going public can be incredibly difficult, but today’s market presents clients with an opportunity to preplan, creating flexibility down the line. It can be of significant value to not rush the planning process and to have used every moment to carefully think about how to best meet their objectives. Rather than push off important and strategic conversations until the IPO market is looking more attractive, use this down time with your clients to strategically plan and it may lead to better outcomes when the market picks back up.
Steve Wittenberg is the director of legacy planning for SEI’s Private Wealth Management business. He provides tax, estate, philanthropy, succession planning and family governance advice to ultra-high-net-worth and high-net-worth clients.
