Oxford research shows TRAs are a cheaper way to do IPOs - Prospective sellers should consider TRAs to make IPOs feasible alternatives to M&A

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A new HBR article from Dr Howard Jones and Dr Rüdiger Stucke of Saїd Business School advocates greater use of ‘tax receivable agreements’ by business owners keen to reduce their exit costs.

‘IPOs are an expensive exit route for company owners. TRAs could be an effect way to reduce exit costs, in preference to other routes such as M&A, dramatically reducing the income tax paid on the company’s post-IPO profits’ says Jones.

Underwriters in the US typically charge 5-7% of proceeds and underpricing of shares takes another 10-15%. Total costs of $100m are not unusual for big deals so it is not surprising that many owners are keen to pursue other exit options. ‘TRAs have been poorly understood and could be used to great benefit in many more IPOs’ says Jones. ‘Many view them with suspicion, thinking they are untested but in fact TRAs have been well-tested in IPO markets including in high profile IPOs. They are a favoured tool of investment banks and a standard method by which private equity firms take portfolio companies public. They deserve to be better understood.’

Under the terms of a TRA, a seller may receive payments for up to 15 years after an IPO. Jones’s and Stucke’s research shows that on average they total three times the cost of an IPO. Before the IPO the seller takes certain steps to ensure that the company will enjoy a higher tax basis after the IPO without creating and offsetting new tax cost for the seller. ‘This can dramatically reduce the income tax paid on the company’s post IPO profits. The seller receives a large portion of the value of these future tax savings, generally payable over 15 years’ says Stucke. ‘They have a feature that has characterised M&A transactions for many years – namely that the delivery of tax benefits to buyers results in a higher price for sellers. Prospective sellers should consider TRAs as a way to make IPOs feasible alternatives to M&A deals.’

Read the full article here.

For further information or to speak with the authors Howard Jones and Rüdiger Stucke, please contact the press office:

Clare Fisher, Head of Public Relations,
Mobile: +44 (0) 7912 771090; Tel: 01865 288968
Email: clare.fisher(at)sbs.ox.ac.uk

Josie Powell, PR Coordinator,
Mobile +44 (0)7711 387215; Tel: +44 (0) 1865 288403
Email: josie.powell(at)sbs.ox.ac.uk or pressoffice(at)sbs.ox.ac.uk

Notes to editors

About Saїd Business School

Saïd Business School at the University of Oxford blends the best of new and old. We are a young, vibrant, and innovative business school, but yet deeply embedded in an 800 year old world-class university. We create programmes and ideas that have global impact. We educate people for successful business careers, and as a community seek to tackle world-scale problems. We deliver cutting-edge programmes and ground-breaking research that transform individuals, organisations, business practice, and society. We seek to be a world-class business school community, embedded in a world-class University, tackling world-scale problems.

In the Financial Times European Business School ranking (Dec 2012) Saïd is ranked 12th. It is ranked 13th worldwide in the FT’s combined ranking of Executive Education programs (May 2013) and 24th in the world in the FT ranking of MBA programs (Jan 2013). The Oxford MSc in Financial Economics is ranked 6th in the world in the FT ranking of Masters in Finance programs (June 2013). In the UK university league tables it is ranked first of all UK universities for undergraduate business and management in The Guardian (May 2012) and has ranked first in nine of the last ten years in The Times. For more information, see http://www.sbs.ox.ac.uk/

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Josie Powell
University of Oxford
+44 1865288403
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Clare Fisher
University of Oxford
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