A ZoomInfo Tax Receivable Agreement – What Is It and Why Is It Important?
As more and more companies go public through IPOs, tax receivable agreements are becoming increasingly common. One such company is ZoomInfo, which went public in June 2020. The company`s tax receivable agreement, or TRA, has garnered a lot of attention in the financial world.
So what exactly is a tax receivable agreement? Simply put, it`s an agreement between a company and its pre-IPO owners that addresses the tax consequences of the IPO. When a company goes public, it typically results in a large increase in the value of the company`s stock. This means that the early investors who owned stock in the company prior to the IPO will have a significant increase in their wealth. However, this also means that they will owe a significant amount of taxes on that increased wealth.
A tax receivable agreement is designed to address this tax liability. Under the agreement, the pre-IPO owners typically receive payments from the company over a period of years to offset the increased tax liability resulting from the IPO. In return, the company receives certain tax benefits.
The ZoomInfo tax receivable agreement is particularly notable because of its size. According to the company`s SEC filings, the total amount of payments to be made under the agreement is estimated to be between $600 million and $1.2 billion. This makes it one of the largest tax receivable agreements ever entered into.
So why is this agreement so important? There are a few reasons. First, it has a significant impact on the company`s financials. The payments made under the agreement are treated as a reduction in the company`s income tax expense, which can have a major impact on the company`s earnings and cash flow.
Second, the agreement has implications for investors. The payments under the agreement are made to the pre-IPO owners, not the public shareholders. This means that the payments can have a dilutive effect on the company`s stock, reducing the value of each share. This is something that potential investors should consider when evaluating the company`s stock.
Finally, the ZoomInfo tax receivable agreement is notable because it raises questions about the fairness of the tax code. The fact that pre-IPO owners can receive such large payments to offset their tax liability highlights the fact that the tax code can be manipulated by those with the resources to do so. This is something that policymakers may want to address in the future.
In conclusion, the ZoomInfo tax receivable agreement is a significant financial agreement that has implications for the company and its investors. As more and more companies go public, tax receivable agreements are likely to become more common. It will be interesting to see how these agreements evolve over time and how they are perceived by the public and policymakers.