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Pricing Stock Redemptions: What's Fair?

Frequently, the majority shareholder(s) works in the business and has one or more siblings not active in the business but holding minority ownership interests. In these circumstances, it’s often sensible and inevitable that the inactive minority shareholder(s) want to redeem their shares. What should be the value of the shares if redeemed?

 

Inactive Siblings Employed Siblings
I think my shares should be bought for the price that I would get if we sold the business. What you’re offering is unfair! It’s only a fraction of that price. No. Your shares are an illiquid minority interest and I have no intention of selling the business. Dad’s past practices set value at a discount from book.
Mom and Dad set that value for gifting and estate planning. They knew this business was worth more. f they were alive today, especially Mom, I’m sure they would urge a better value! No. Mom and Dad wanted to see this business continue in the family. Besides, you don’t appreciate all the value we’ve created for this business. Don’t we family managers deserve a break? And recognition?
We’ve sacrificed too! Our parents were never around growing up. They said the ownership of this business was one way they wanted to make up for that. Besides, you’ve been well paid, have good benefits, and have had the fun of a career in the family business. We wish we’d had more of a chance in the business like you did! I feel you think this has all been easy. You don’t know how hard it was to work for Mom and Dad all these years. You’ve done your own thing. I wish I had that freedom. You also don’t appreciate how much this business is a memorial to them. We can’t compromise its survival and strength because you feel you’re due more money.

 

The refrain, “My investment should be valued more; you don’t understand what intangible role I have played,” is very common in these situations. It’s obviously a difference in perspective. Those who work in the business do enjoy some fruits and do make contributions that cannot be valued. Those who don’t work in the business often feel undervalued as people, unheard, and perhaps, as long-time supporters of keeping dividends low, unappreciated. “Fairness” is such a relative concept — especially among relatives!

There are some steps that can be taken to lessen the potential for conflict over pricing of shares:

  • The founding parents can explain why they chose the stock’s valuation formula. The answer often involves more than saving of gift and estate taxes — it’s usually to aid long-term family ownership.
  • The employed siblings and the inactive siblings should learn from the parents and hear from each other how valuable the others’ contributions are and how valid their perspectives are.
  • The employed sibling owners should be conservative along the way with regard to dividends. They should also be modest and open about their compensation and perks from the company.
  • The inactive sibling owners should accept that the business was like a “child” to the founder, but hopefully not take it personally.

The bottom line has to do not only with pricing of shares, but with the quality of the relationships among the siblings and the frequency and fullness of communication. It’s hard not to see one’s self-worth in monetary terms. But those who become trapped in that confusion suffer damage to themselves, their relationships, and ultimately, to their pocketbooks.

 

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