Private company tender offers: How do they work and why they occur?

What Is a Private Company Tender Offer?

When you hear the term “tender offer,” you might think someone’s suggesting a juicy steak or giving you a heartfelt choice. But in the context of investments, a classic tender offer is a request to buy a chunk of stock from existing shareholders.

A tender offer might come from a third party, such as an investment fund, or a company might put out a tender offer to buy back its own shares. Each relevant shareholder or bondholder then has the option to tender — i.e., sell — their shares. In many cases, the entity making the tender offer will buy at a premium to fair market value to entice sellers.

Sometimes tender offers occur at publicly traded companies, such as if an activist investor wants to buy a large equity stake in a company; to do so, they might need existing shareholders to sell some of their shares. Or, a tender offer for a public company might be used to take a company private.

But tender offers can also be used at a private company, such as if an investor wants to acquirea stake in a company. This can happen either 1) as part of a primary fundraising round, where an investor acquires a stake in the company by buying new stock issued by the company in the primary round and simultaneously purchases stock from existing employees and/or shareholders, or 2) through a stand-alone tender offer (with no primary round) where the investor just purchases from existing employees and/or shareholders.

Or, a private company might issue its own tender offer to offer liquidity to employees and/or investors by buying back their shares.

How Does a Private Company Tender Offer Work?

To start, the purchasing investor(s) and the company (or just the company if only the company is buying back the shares) determine the framework of the tender offer. After finalizing the terms, the company sends a notice to all employees and/or shareholders eligible to participate in the tender offer. This notice, also known as the offer to purchase, will generally include information such as:

Offer to Purchase Date

This date, also known as the offer date or commencement date, is when the tender offer starts.

Expiration Date

The tender offer generally isn’t an ongoing solicitation. Instead, it runs for a set period with an expiration date. Tender offer rules generally require at least 20 business days. If the offeror doesn’t get what they’re looking for by the expiration date, the tender offer might end, or the buyer and/or company might extend the expiration date.

Settlement Date

This date is when the buyer(s) formally purchases all shares tendered during the offering period and delivers cash proceeds to the sellers.

Tender Price

A tender offer has a set price at which the buyer will purchase the stock This price per share can be determined on a variety of factors, including the buyer’s review of the company’s historical and projected financial performance, valuations attributed to company peers/competitors, and the price per share paid by past investors for the company’s stock.

Amount Being Purchased

The offer to purchase also sets forth the number of shares being purchased. Sometimes a tender offer is to purchase a specific amount of shares, whereas other times it can be set as a range. In addition, a buyer might also negotiate the right to purchase additional shares in the event sellers tender more shares during the offering period than the buyer originally committed to purchase.

Eligible Participants

The offer to purchase also dictates who is entitled to sell shares in the tender offer. For example, it might be limited to only founders and executive level employees, or broadly opened up to all current and former employees.

Why Participate in a Private Company Tender Offer?

Deciding whether to participate in a private company tender offer depends on the specifics of the tender offer and your situation. For those making the tender offer, there can be many motivations, like acquiring equity in a company that might otherwise be hard to invest in, or a company might want to buy back shares to regain more of an ownership stake. For sellers, the choice depends on what makes sense for your finances. At private companies, a tender offer can be a liquidity event. If you’ve exercised your stock options and have been waiting for an IPO, but then a tender offer comes along, perhaps you’d decide to take the cash now if it’s available. Early investors might also be looking for liquidity and would be willing to sell if a tender offer comes along. Keep in mind that if you sell securities via a tender offer, you’ll likely owe taxes. Those could be either capital gains taxes or ordinary income taxes, depending on details like how long you held the securities before selling.1

Key Takeaways

Private company tender offers can be a bit confusing, so take a look at these key takeaways to refresh your understanding:

  • What are tender offers?

    Tender offers are broad solicitations to buy equity from existing employees and/or shareholders. They run for limited periods and typically with set prices. How do tender offers work? Tender offers work by a prospective buyer setting the terms for what they’re looking to purchase, such as the number of shares and the price per share. Eligible sellers are then contacted and the offering period begins. Shareholders then have the option to sell, but they don’t have to if they don’t like the terms of the tender offer.

  • Why do tender offers occur?

    Tender offers can occur for several reasons, like if an investor wants to buy a large stake in a company, or if a company wants to offer a liquidity event, as it gives early investors and employees ways to cash out.

  • Do tender offers incur taxes?

    When you sell securities, that often triggers capital gains taxes. But with a private company tender offer, there’s the possibility that sellers would incur ordinary income taxes, which tend to be higher. It depends on the structure of the tender offer2 and how long the sellers have held the securities.

1 Tax, Accounting and Startups

2 Founder’s Circle

About the Author

Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets.

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