Unlocking Value With Tax Receivable Agreements

What Are Tax Receivable Agreements?

Tax receivable agreements (TRAs) are contractual tax-sharing agreements whereby the obligor, or company, pays a percentage of the tax savings it receives from the use of specified tax assets to the holder of the contract.

Navigating the Complexity of TRAs

While TRAs allow sponsors and founders to capture additional value from tax assets they have delivered as owners at the time of exit, holding them comes with specific challenges:

  • Uncertain Timing of Cash Flows: TRAs are long-dated instruments. Cash flows depend on the amortizable life of the underlying tax assets as well as the obligor’s ability to generate taxable income.
  • Long-Dated Cash Flows: TRAs can extend 20+ years and often outlive funds that hold them.
  • Potential Conflicts: If the TRA holder also holds a significant position in the obligor’s equity, their interest may not fully align with that of the unaffiliated shareholders in the obligor.

How Houlihan Lokey Can Help

We advise on all matters related to TRAs and are actively shaping the secondary market for these assets.

Our Services Include:

  • Strategic Monetization: We can help you maximize the value of your asset, whether that be through a sale of the asset or a structured financing.
  • Independent/Special Committee Advisory: We advise boards and committees on buying back TRAs or negotiating a TRA during an M&A process.
  • Valuations: Fairness opinions, tax, or compliance-driven valuations.

Click here to learn more about our capabilities.

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Additional Content

The Takeaway: A Q&A With Tom Goldrick and Michael Mulkerin on Tax Receivable Agreements

Tom Goldrick and Michael Mulkerin shed light on the market and tax receivable agreements, including hallmarks of a typical sales process, the evolution of the market, and the opportunity for investors as the TRA market grows alongside a rebounding IPO environment. Read the article.

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