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Choosing to Sell Your Shares


Dear Advisor,

My sister and I inherited our family business from our father almost 20 years ago when he passed away. I have never worked in the business, and she has run the business for the past ten years and worked there all her life. As I near retirement, we have very different perspectives about what we want from the business. I think the business could perform better and would like to see a higher dividend. She is content with her salary and does not think the business needs improvement. She has gotten tired of my input on the business. Even though I own 1/3 of the business, she thinks I do not deserve a say because I haven’t worked there. But, she owns the same percentage as I do (the remainder is in trust for our children). Things have gotten so strained that in the heat of the moment, I have suggested it might be better to sell out. Last week she informed me that she thinks my selling out would be the best option for the family and the business, and she would like to hire an investment banker to pursue this option. I am not sure I am ready to let go of my family’s legacy. Can she force me to sell my shares? What should I do?
Hopefully you have a buy-sell or shareholder agreement that specifies the requirements for transferring shares between parties. This agreement will govern whether or not you are required to sell your shares to the company in a provision typically called a call provision. If there is no mandatory requirement for you to sell your shares to the company, the decision to sell will be your choice. In most cases, the company (or your sister) would not have the authority to make you sell your shares.
 
So, the decision will be up to you. While there are certainly important economic implications of the decision, it is just as important to consider the emotional implications. Are you ready to lose your family legacy? In some cases, families fare better if members sell out because tensions are relieved. In other situations, selling out can lead to life-long resentment. Only you can do the soul searching required to decide if selling now is the right answer for you. An additional consideration will be the role your children are likely to play in the future. Even if you sell out, they will be owners when they inherit their trust shares.
 
Once you have considered your emotional reaction to selling out, you need to look at the economic implications. The goal is to compare the financial outcome of selling out to that of staying as an owner. You will likely need the help of an expert to make these calculations, particularly in valuing your share of the business. Typically the buy-sell or shareholder agreement will specify how the valuation is conducted.
 
If you sell out, you will have access to capital that can be invested for a return. In many cases, when shares are sold, this capital is paid out over time, which needs to be taken into consideration. Compare the return you can get on the money you receive by selling out to the money and other benefits you may receive from staying as an owner. If you are not receiving any dividends, or very low dividends, then the benefit you earn is appreciation in the value of your stock. However, if you never intend to sell the stock, that appreciation may not be meaningful. It certainly can’t pay the bills.
 
Once you have taken emotional and economic considerations into account, you will be in a good position to respond to your sister.
 

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