Should I Sell Equity During a Tender Offer

8.25 MIN READ

Working for a private company has its perks, but sometimes people dream of the company they work for having an initial public offering (IPO). People typically want this to happen because all their stock in their private company can make more money than the initial stocks.

Unfortunately, a private company doesn't always end up having an IPO. Another way private companies and their employees can turn a profit from stocks without going IPO is with a tender offer.

You probably have several questions if you work for a private company and have recently received a tender offer. Before you accept or reject this offer, learning everything you can about tender offers is essential.

What Is a Tender Offer?

It's one thing to receive a tender offer, but what does this mean? What tender offer rules apply? A tender offer essentially allows multiple sellers to tender their shares of a company's stock to someone else, which could be back to the original company, an investor, or a group of investors.

Tender offers are an excellent way to sell some of your company's shares while they remain a private business. Usually, you have to wait for your company to go IPO to sell your shares, but tender offers allow you to make a profit this way while the company is private.

How Do Tender Offers Work?

Knowing what a tender offer is, is excellent. But understanding how the tender offer process works is crucial so you know whether you should sell your equity during a tender offer or not.

Tender offers work when a buyer offers to buy company shares at a specified price. All shareholders can participate in a tender. The buyer and company executives will negotiate a set price before releasing the offer.

Once the buyer and company agree on a price, the private company will begin preparing disclosures and other necessary documents for the tender offer. After this step is complete, company share sellers can look at the offer and decide if they wish to sell all or a portion of their shares.

You'll have at least 20 business days to evaluate the offer, ask questions, speak with an advisor, or do anything else you need to do to determine whether you'll accept or reject the bid. The U.S. Securities and Exchange Commission (SEC) set this rule to ensure everyone with eligible shares has the same opportunity as others.

The company you work for should provide you with all disclosures and other documents necessary to help you make an informed decision regarding selling your shares.

Information to Look Out For

If your company gives you a tender offer statement, there are a few things you'll want to be on the lookout for. They should provide all the necessary information regarding selling, but make sure you look for or ask questions about these factors.

Rules and Regulations

Even though you have shares in the company, not everyone may be allowed to participate in the tender offer. In addition, some companies will have rules in place, such as you have to hold the stock for a specified amount of time before considering selling.

Other standard regulations private companies put in place include the number of shares you're allowed to sell during a tender offer. Knowing their rules can help you make a more informed decision about selling your shares.

Taxes

You need to consider the taxes involved with tender offers. You won't pay ordinary income tax. Rather, if you can sell the resulting shares in one transaction, you will pay income tax on the difference between what the shares are worth and what the buyer offered. Depending on how much you make from the sale, you could move to a higher tax bracket.

If you already own tender shares and are interested in selling them, expect to pay capital gains taxes. However, you'll only pay this tax on the increased value of the shares between what you paid and how much you sold them.

You'll pay long-term capital gains if you've held a stock for at least one year from when you bought it. You'll only pay this on the difference between the cost of the stock and what you sold it for.

Selling your shares before you reach whatever holding period it requires means you'll pay short-term capital gains.

Pros

The pros of selling your equity during a tender offer include:

You can make money off illiquid equity
More often, you get to sell your shares for more than they're worth
You can use the profits to improve your financial situation by investing, saving, paying off debt, etc

Cons

While selling equity during a tender off has a lot of advantages, there are also some downsides to consider:

You may not meet the holding period requirements if you sell all your equity in one transaction
The shares could become more valuable later, causing you to lose out on a substantial amount of money

Reasons for Making a Tender Offer

Many companies make tender offers to employees to buy back some of the stock, allowing them to gain more significant equity in their own company while offering more returns to other shareholders.

Types of Tender Offers

Knowing the basics of tender offers is just the beginning. To determine whether a tender offer is good for you, you should know the difference between the two types.

Corporate Repurchase

Also known as share buybacks, this type of tender offer allows the company to buy back shares from its shareholders.

Third-Party Tender Offer

Unlike a corporate repurchase, some tender offers bring in a third party. These can be investors or a group of investors interested in buying shares of a private company.

Tender Offer Examples

Take a look at this example to help you better understand tender offers:

Company A's stock price is currently at $15
A buyer will submit a tender offer higher than the stock price, let's say at $18
Buyers will submit an offer under the stipulation that they acquire at least a certain percentage of the company's shares (50%)
If shareholders collectively sell at least 50% of the company's stock, then the tender offer will go through
If you have 100 shares at $15, you have $1,500 invested in the company
The buyer will pay you $18 for those shares, so you'll be getting back $1,800 before taxes

Accepting a Tender Offer

Before you participate in a tender, you'll need to submit your request before the deadline if you decide to accept. If you don't, you're no longer eligible for the offer. How you'll submit your instructions depends on the company, but usually, you can send an email to your broker, call them, or tell them in person.

If the offer goes through, you'll see however many shares you sold removed from your portfolio and replaced with the agreed-upon dollar amount. If there aren't enough people accepting the offer and less than the required percentage of shares are tendered, you'll get to keep your stock as if nothing happened.

Rejecting a Tender Offer

Whether you decide to reject the tender offer or forget to submit your request before the deadline, you still get to keep your shares. Sometimes, it's beneficial to wait to sell for a better offer. Investors will often go with a second tender offer at a better price if they don't get enough people to accept the initial offer.

If you plan on rejecting the offer, it's still best to let your broker know so they can tell the buyer. This way, they may be more enticed to offer more down the road instead of thinking you missed the deadline.

Tender Offer FAQ

Still unsure whether to sell equity during a tender offer? Check out these frequently asked questions.

Should I Sell Equity During a Tender Offer?

Whether you should or shouldn't sell your equity in a company during a tender offer is up to you.

For example, if you're okay with getting rid of your shares and making a significant profit, you should sell your equity when you receive a tender offer. On the other hand, if you want to wait for the price to go higher, you may want to hold onto your shares and deny the tender offer.

What Does a Tender Offer Do to a Stock Price?

When offered a tender offer, the price they're offering for your share in your company's stock goes up. With stock prices rising, it's an incentive for you to sell them your shares.

Can a Company Force You to Sell Your Stock?

Yes. A few situations where a company can force you to sell your stocks. It doesn't happen too often, but you need to be aware of the cases where this can happen.

Look into your shareholders' agreement. There may be stipulations regarding forced sales and if another buys your company out. Usually, when a company is acquiring another, the stocks from the original company are sold, even if the holder doesn't want them to be, and then replaced with money based on their value.

Key Takeaways

Tender offers are when you can sell some or all of your shares back to your company or an investor. They're a great way to improve your financial situation by paying off debt, investing in other stocks, saving, etc.

Knowing whether to sell your equity during a tender off is essential to ensure you're making the right financial decision for yourself. Be sure to read all the necessary documents and consult a financial advisor or tax professional if you have further questions or need tax advice.

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