Page 50 - Initial Public Offering - An Introduction to IPO on Wall Street

thereby reducing future profits from converting into a corporation.

Greater proceeds on exit—past owners can obtain an extra 40–50 percent after exiting by
signing a Tax Receivable Agreement (TRA) with PubCo in tandem with the IPO

Liquidity—past owners have liquidity rights comparable to those they would have owning
PubCo shares through exchange rights directly.

Ability to keep control—previous owners can maintain high-vote shares in PubCo in order to
maintain control of the organization post-IPO.

When evaluating the existing tax structure’s efficiency for IPO readiness, one of the most
important things to do is evaluating the business’s net operating loss carryovers.

Recording net operating losses is favorable for the organization because they can be typically
carried back two years and carried forward twenty years, counterbalancing the profits gained
in those years to its full degree. Any of this gain, however, would be lost if a corporation with
net operating losses becomes a public corporation and the IPO leads to a "change of
ownership."

A technical term, "Ownership change" is described by the Internal Revenue Code as an
ownership change (over a three-year period) exceeding 50 percent. When a "change of
ownership" happens, a business with net operating losses may always be permitted to use just
a percentage of its net operating losses in subsequent years to cover revenues.

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