After years of building your company, you’ve made the decision to sell, and you’ve even found a favorable offer. Now, you need to inform your team. If you’ve offered phantom stock to your key employees, they’ll want to know what happens to that equity. Though the numbers will be unique from one business to the next, here are the basics of what everyone needs to know.
What Happens to Phantom Stock When a Company Sells?
By definition, phantom stock is equity offered in a company without ownership attached. However, it does provide cash payment when a specific event occurs, such as a sale. So, what happens then?
· In asale, the value of the business is calculated, and it is on this amount thatcash payments will be based.
· Payoutswill be determined based on the total sales price, broken down per share and,the quantity of equity shares provided.
· The buyer of the organization deducts the amount appropriated for employees throughthis program from the total acquisition cost.
How Do Taxes Work with This Arrangement?
Most of these equity plans are set up as deferred compensation, meaning no income tax willoccur until the plan pays out to employees. When you sell your business,employees will owe tax at their ordinary income tax rate on the amount theyreceive. After that, it’s pretty straightforward, as it will be reported withtheir regular income.
For thebusiness, these payments are deductible as expenses related to compensation,which reduces taxable income.
Attracting a Buyer
Having aphantom stock program in place may make your business more attractive tobuyers. It signifies mutual investment in its employees and vice versa. Withall parties having some skin in the game, the enterprise is more likely to have a solid foundation—giving buyers greater confidence in their purchase. Givingemployees an incentive to help build your organization into the best in classmeans that all of you will benefit from its sale in the long run.
When you workwith a phantom stock implementation company like Reins, you gain access to specialists whowill help you implement the program and also handle eventual compensationallocation due to a sale or other triggering event. Reach out to Reins today tofind out more about successful phantom stock implementation.
