Background: A silent business partner passed, leaving his shares equally to his two children. The current active business partner runs the business. The silent partner’s children know very little of the activity of the business. One of the two kids would simply like to “cash out” indicating he would accept $20,000 for his shares. This is The Good!
Our Case: B&E works with this client on their company’s retirement plan and the active owner’s personal retirement plan. The client, of course, was very eager to buy out the shares from the one son for this low sum! Fortunately, he mentioned it to us in passing.
While on the surface, it would seem that a “willing buyer and willing seller” would be able to strike this deal. However, this may well violate his shareholder obligations. This is The Bad.
At a very minimum, a rough estimate of the business value, with proper discounts should be done. Once this is calculated and a “reasonable” price determined, they can then strike whatever deal they are both willing to negotiate. But without having updated values, and simply accepting the offer, this could unknowingly put our client at risk. This could be The Ugly!
In addition to securing an estimate of the business value, governing documents of the business should be evaluated. Is our client able to simply buy those shares as offered, or do the shares have to be offered proportionately to all current shareholders? It will be important to determine the proper steps for buying and selling to avoid potential disputes with other shareholders.
The Results: While it certainly could have been easier, and potentially cheaper, to simply accept the offer to buy for the mere $20,000, moving through a more thorough and formal Business Transition process allows both the buyer and the seller to have detailed documents on the value and validity of the sale. A smaller investment in doing it right the first time could save a tremendous amount in potential legal fees and other issues versus taking the “easy route” and facing the possibility for things to go sideways.
Bottom Line: Shareholders have an implied duty to their fellow shareholders. Any breach of that duty, even unknowingly or unwillingly, can be very costly. Taking the time to do it right can offer great protection to all parties of the transaction.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from Valmark Securities. (1) Names have been changed to protect the identity of the client.
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