What's a Fair Price?
What’s a Fair Price?
I own about seven percent of a substantial family firm and am non-active in the business. Eighteen cousins have inherited stock. At a recent meeting, we talked about selling the business. After a long discussion, I was the only one wanting to sell. I have no children and want the opportunity to make other use of my assets. How do I sell my shares and what is a fair price?
While the question you’ve raised is not uncommon, the answer to it can be very complex. The key word in your question is “fair,” and hopefully it applies to process as well as price.
Some would say that the answer is achieved by professional valuation specialists who study your business and determine its worth. Then you can get your seven percent. Others would say: “There’s no market for these shares. We don’t need to pay anything.” Fairness lies between these two extremes. We strongly urge family firms in their 2nd or 3rd generation to establish formal mechanisms by which family members can sell shares. As to “fair” price, families often like to keep price low to minimize estate taxes. Full market price is available only if the full business is sold. If families wish to reinforce the financial strength of the business, price is often set at a significant discount to book value. Other families determine that book value (or adjusted book value if there are clearly appreciated assets) is the least arbitrary approach to the question of value and use that number to set price.
We encourage families to enact shareholders’ agreements that clearly lay out the conditions and terms of sales long before anyone wants to cash in his or her inheritance. Then, when the time comes, the decision will not be viewed as a reaction to any individual’s desires. When those mechanisms are in place, “fair” usually favors the company’s continuity and the remaining shareholders. After all, the stock in family businesses is most often a gift from a previous generation who wanted to encourage family ownership and continuity.
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