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Establishing Share Value

We often recommend that business families have a share redemption process in place to provide freedom to exit for those who don't want to put the effort and commitment into the responsibilities of ownership, or for whatever reasons. But a redemption plan requires a share valuation. And share valuations can be tricky topics. Here are the perspectives of two cousins, one the CEO, the other a non-employed minority shareholder.


Family CEO Non-Employed Owner
I appreciate that we need a share valuation method. But I hope we're all wise enough to want the price as low as possible. That way we can minimize estate taxes. I don't think that's fair. Why punish someone who wants to sell? Wouldn't the business be happier if uninterested owners were given incentive to sell?
Perhaps, but I also want to encourage gifting of shares to future generations. The lower the valuation the more we can pass on. Besides, the business needs to preserve all the capital it can. I understand. In fact,I really don't want to sell. But it's a question of "fairness" to me and also of wanting to protect the company from ownership disputes.


The conversation can take more twists, too. Some might argue that a higher valuation actually gives incentive for more pro-active and quicker estate planning. Further,if the value of the shares are higher,perhaps owners will be prouder of their ownership position and strengthen their commitment to the business. Finally, maybe a higher price on the shares can be offset by more favorable terms of buyback,such as length of years to complete an installment repurchase.

The moral of this example is that things are not always as simple as our stereotypes may suggest. It's important to listen closely to all perspectives and alternatives. It's also important to set the policy as soon as possible while all have the goodwill to listen carefully and be open to alternatives.




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