| For those that have been a victim of a
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| | shareholder buy-outs:
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| minority shareholder squeeze out, the
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| | Average sale price was 36% below
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| experience can be a nightmare. It usually
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| | accounting book value
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| involves the majority shareholder first
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| | Only 20% were at discounts of less than
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| terminating the employment of a
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| | 20%
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| shareholder of less than 50% of the
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| | 53% sold at discounts ranging from 22% -
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| privately held company's stock. The
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| | 48%
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| benefit to the minority shareholders in
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| | 23% sold at discounts ranging from 54% -
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| owning the stock is primarily their
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| | 78%
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| employment and the anticipation of a fair
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| | Note: The metric used was accounting book
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| purchase price when the entire company is
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| | value not fair market value. For most
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| sold.
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| | going concerns, net book value is not
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| Dividends are seldom paid to
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| | even close to true market value. Net book
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| shareholders, and if they are, they are
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| | value might apply if the company was
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| minimal. After the minority shareholder
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| | losing money or making so little money,
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| is terminated, he receives an offer to
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| | that the break up value of selling the
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| purchase his shares from the majority
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| | assets exceeded a valuation based on the
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| holder or the corporation for what he
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| | earnings capacity of the business. In a
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| feels is way below market price. When he
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| | company we recently looked at, for
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| objects, he is referred to the
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| | example, the net book value was about $3
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| shareholder agreement that he signed
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| | million. The fair value, however, based
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| years ago that gives the Corporation or
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| | on comparables and a discounted cash flow
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| other shareholders the right of first
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| | valuation was closer to $10 million. So
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| refusal to purchase his shares at
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| | the best way I can describe these buyout
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| valuations that are not even close to the
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| | offers is punishing.
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| fair value of his shares.
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| | Remember the first reaction is the
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| The first reaction is to sue. Let me tell
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| | lawsuit. Unless the majority owner does
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| you it is usually a waste of time and
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| | something stupidly oppressive, there are
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| almost always a waste of money. After
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| | no grounds that can force him to buy your
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| all, you signed the shareholder agreement
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| | shares at anything other than what is
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| that states very clearly:
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| | stated in the shareholder agreement. He
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| Right of First Refusal: The Corporation
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| | really does not have to buy your shares
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| Shall have the power, at its option to
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| | at all. He can simply wait you out and
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| purchase any and all of its shares owned
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| | pay no dividends, and pass the business
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| and held by any shareholder who should
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| | down to the next generation. Your family
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| desire to sell - the shareholders shall
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| | could conceivably get no value for the
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| not assign, transfer, encumber, or in any
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| | ownership for a hundred years. Remember,
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| manner dispose of any or all of the
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| | most likely your benefit from being a
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| shares of the corporation that may now or
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| | minority shareholder was that you were
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| hereafter be held or owned by them, and
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| | employed by the company.
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| no such shares shall be transferable
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| | Many squeezed out shareholders try the
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| unless and until such shares have first
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| | route of wrongful termination lawsuits.
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| been offered to the corporation.
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| | Again, great for the lawyers, not such a
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| It gets worse folks:
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| | sound risk reward decision. Typically
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| In the event the Corporation exercises
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| | they will spend $100,000 in legal fees to
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| its right of first refusal under the
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| | recover one year's wages of $150,000.
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| above clauses, the purchase price shall
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| | Other than the satisfaction of sticking
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| be payable in cash or bank check, and
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| | it to the majority holder, it is pretty
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| shall be the book value of the shares,
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| | much useless. If you think this wrongful
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| exclusive of goodwill, as of the first
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| | termination lawsuit can somehow be used
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| notice, as determined according to
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| | to leverage the majority shareholder into
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| generally accepted accounting principles
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| | paying fair value for your stock, you are
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| and shall be binding upon the parties.
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| | deluding yourself. Unfortunately, the
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| According to the Coolidge Study Fixing
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| | legal counsel you have hired will support
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| Value of Minority Interest in a Business
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| | your delusion.
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| Actual Sales Suggest Discounts as high as
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| | A client was attempting this ill-fated
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| 70 percent from what would be considered
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| | approach and had been at it for over a
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| the fair value of the entire company
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| | year and spent over $100K on a wrongful
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| multiplied by the minority shareholder's
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| | termination lawsuit. Our advice went
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| percentage ownership.
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| | something like this, Dan, you are
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| A number of years of experience has
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| | focusing on the wrong thing. You are
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| demonstrated that it is extremely
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| | spending all your time and money thinking
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| difficult to find any market for minority
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| | your wrongful termination lawsuit can
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| interests
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| | somehow benefit your cause to improving
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| -despite efforts to do so - On the
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| | the buyout offer. If you win, your one
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| relatively rare occasions when an offer
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| | year in salary recovery will just about
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| is made to buy a minority interest, it is
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| | break you even with your legal expenses.
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| almost always for an amount far less than
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| | You have been offered $500 K to purchase
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| the fiduciary and beneficiary expect to
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| | your 47% interest in a business with an
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| get.
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| | enterprise value of $9 million. Let us
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| Why does this happen? The majority
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| | help you focus your efforts on chasing
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| shareholders whose attorneys drew up the
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| | the correct pot of gold.
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| shareholder's agreement certainly balance
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| | I know what you are thinking. I already
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| the scales way in favor of their clients.
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| | know this. I have lived this. Why have I
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| Secondly, IRS Revenue Ruling 59-60 allows
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| | wasted my time reading this article to
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| steep discounts when valuing minority
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| | have you tell me what I already am
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| interests in privately held companies.
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| | painfully aware of? OK, maybe I can
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| The lack of marketability discount can be
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| | shine a ray of sunshine. We recommend an
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| as high as 40%. A second discount for
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| | investment banking approach to encourage
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| lack of control for up to 40% can be
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| | the majority shareholders to allow the
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| applied on top of that.
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| | minority shareholders to unlock more
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| Armed with this knowledge and backed by a
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| | value for their shares. It involves a
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| favorable shareholder agreement, the
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| | great measure of deal making fineness to
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| majority shareholder is under no
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| | help the majority shareholder recognize
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| compunction to offer anything close to a
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| | what's in it for him. If that fails, the
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| fair price for the squeezed out minority
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| | majority shareholder has to make an error
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| holder. Below is the sad news that
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| | and then you can attempt a minority
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| results from this environment as reported
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| | oppression lawsuit.
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| by the Coolidge Study of actual minority
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