How do I Buy Out Other Shareholders in a Family Business?

Question: Whit, Broadway, Va.
I'm 30 years old and within five years I would like to be able to buy my family's business. I need help determining what it's going to cost to buy out the two shareholders. I would also like to find out what the process is for buying them out.

Answer:

The first thing you should do is find out if the original owners of your family business established a shareholder buyout agreement, also called a "buy-sell" agreement. This agreement outlines how the owners of a corporation or partnership can either sell or buy ownership shares in the business, including information about the share price (for corporations) and who can buy shares in the business. (If you are not a current owner in the business, you might be restricted from buying stock depending on the buy-sell agreement.) There may even be limitations on how many shares one person can own, which is very important for you to know if you plan on owning all shares in five years. Attorney Bethany K. Laurence describes a buy-sell agreement as a "premarital agreement between shareholders."

If there is no buy-sell agreement, things can get a little more complicated. You and the other business owners will have to come to a new agreement about how they will be bought out. The most important detail is how the company value will be determined. You will probably need to hire a business appraiser or trusted accountant to do a full scope valuation of the business to determine its buyout value. Since there are three owners in this case, you would then divide the appraised value of the business by three to determine how much each owner is entitled to for his or her share in the company. You also can perform this business valuation yourself using software and the last few years of the company's financial data. However, to get a professional, unbiased opinion about the buyout value of the business, it's best to hire a third-party firm.

The next issue that you might face is a situation where the other two shareholders don't agree with the business valuation, or simply do not want to sell their stake in the business at that price. One or both may ask you for a higher amount. It is up to you (and your projections for the potential of the business) to decide if you are willing to pay more than what the valuation says their shares are worth.

What we're assuming here is that the other shareholders are willing parties to this transaction. If you do not have full consent from the other two shareholders to buy out the business, the process becomes even more complicated and may end up going to court. Litigation on business ownership matters can take years to resolve and cost you thousands in legal fees. But according to Daniel S. Galligan, an attorney who specializes in corporate law and mergers and acquisitions, "The threat of judicial dissolution may be enough to get the buyout negotiations started."

If the business is a partnership, are the other two shareholders actively participating in the business and executing their duties as described by the partnership agreement? Keep in mind that many partnership agreements are drawn up with a clause stating that if one party is not living up to his or her responsibilities as they are defined in the contract, that partner is effectively forfeiting his or her stake in the business, though you may still need to buy out the partner.

In any case, the best advice is to retain the services of a lawyer who has experience in corporate and small business law and who can help guide you through this sometimes complex and lengthy process.

This article is intended for informational purposes only and is not a replacement for professional legal advice. Always consult an attorney prior to taking any kind of legal action.