Tender Offers: Company-Approved Sales
Tender offers provide a structured, company-sanctioned way for shareholders in private companies to sell their equity. Think of it as a coordinated sale, where the company sets the terms and often facilitates the process. This contrasts with individual secondary sales, which are negotiated directly between a buyer and seller.
How Tender Offers Work:
- Company Initiative: Tender offers are typically initiated by the company itself. They might be prompted by investor demand, employee liquidity needs, or as part of a broader strategy.
- Set Price & Terms: The company, often with input from an advisor, sets the price per share and other key terms, such as the number of shares eligible for sale and the timeline.
- Shareholder Participation: Eligible shareholders can choose whether or not to participate in the offer. They’re not obligated to sell.
- Designated Buyer(s): The company typically designates a specific buyer (or a small group of buyers) for the tender offer. This could be an existing investor, a new investor, or even the company itself (through a share repurchase).
- Streamlined Process: Tender offers often streamline the sale process, handling much of the administrative and legal work, making it easier for shareholders to participate.
Benefits of Tender Offers:
- Simplified Sale: Reduced paperwork and complexity for shareholders.
- Price Transparency: A set price per share provides clarity for both buyers and sellers.
- Company Oversight: The company’s involvement can add a level of comfort and legitimacy to the transaction.
- Potential for Higher Participation: The structured nature of a tender offer can attract more sellers than individual secondary sales.
Potential Drawbacks:
- Limited Negotiation: Shareholders have less control over the price and terms compared to individual sales.
- Not Always Available: Companies don’t always conduct tender offers, and eligibility criteria may apply.
- Tax Implications: As with any equity sale, there can be tax implications that shareholders should consider. (See [[Capital Gains Tax]] and [[AMT]])
Tender Offers vs. Secondary Sales:
| Feature | Tender Offer | Secondary Sale |
|---|---|---|
| Initiated by | Company | Individual shareholder/buyer |
| Price Setting | Company/Advisor | Negotiation between parties |
| Buyer(s) | Designated by company | Negotiated between parties |
| Process | Structured, streamlined | More individualized |
| Company Control | High | Low |
Example: Imagine a company decides to offer a tender offer at $50 per share. An employee who owns 1,000 shares could choose to sell all, some, or none of their shares at that price. If they sell all their shares, they would receive $50,000. (Note: This is a simplified example and doesn’t account for any fees or taxes.)
Learn More:
- [[Secondary Market]]
- [[Liquidity]]
- [[The Importance of Planning for Liquidity]]
So here’s what we covered:
- Definition and mechanics of tender offers.
- Benefits and drawbacks for shareholders.
- Comparison of tender offers and individual secondary sales.
- Simple example to illustrate the concept.
- Links to related resources for further learning.