So an owner of a building died 20-years ago, after his death his building was split among his 3 children who are now the owner of the c-corp. They never got a long and therefor the building has sat unencumbered for 15-years. One of the childen just died leaving 1/3 of shares to her husband. Now one of the operating partners want to buy these 1/3 of shares to both keep it in the family and plans to further invest in remodeling and renovating(100-year old building).
The sale price of the building is much higher than the cap rate iplied value. However the partner who wants to buyout the other only wants to buy based on what the debt service would carry because he plans to take out a mortgage. Let's say deseased partners husband is "due 1mm" and the operating partner can only take out a 500k mortgage to buyout partner.
Is there a way to force a buyout, or dilute the equity share? The deceased partners husband claims he can find a buyer for his shares(good luck) and have the new buyer be the minority partner in a family owned business with no control over disbursements. How would you go about buying out the non family member.
Absent a shareholder agreement (or some really shady shit that will most likely get the OP sued for breach of fiduciary duty/fraud), there really isn't any way to force the buyout.
I'm assuming that the OP has the support of the 3rd child for the buyout? If so, then the easiest way to accomplish what he wants is to borrow the money from the 3rd kid using an intrafamily loan. Say the property was worth 9 million and can support a 6 million loan. The OP uses the proceeds from his share ($2 million) and then borrows $1 million from the 3rd child at the intrafamily rate (which is something like 1.5% for a 10 year deal right now). At the end of the deal, the husband would be out, OP would own 66% of the shares and would have a $1 million loan to the 3rd kid who owns the remaining 33%.
Now, if the OP doesn't have the support of the 3rd kid, then he is basically screwed since he doesn't want to come out of pocket to buy the shares and the husband has no reason to sell them for a discount.
You said that the minority partners have no control over disbursements and that may be true (really depends on the by-laws of the company and how hard/easy it would be to displace the OP), but if the OP wants to take a distribution, he has to distribute to all of the other shareholders as well. The husband might not have perfect liquidity of his shares, but he will always get disbursements as long as the OP wants to get paid.
Another thing to consider is what happens when the OP/3rd child dies? Do their shares go to a spouse or are they getting split and given to multiple people? Clearing up the ownership now (where the OP owns 66% of the shares and therefore has the majority of the voting power), is way more important than letting the shares get passed around to tons of heirs where if something happened, the OP could find himself no longer the OP of the company. (like what happens if kid 3 has 3 heirs each with 11.1% each and two of them side with the husband? The OP could find himself no longer the OP.
This is great stuff.
The OP would pass on their shares to spouse, no worry about their shares being broken up.
What isn't this intra family rate and borrowing you are speaking of? I had just assumed that the ol would have to take out a loan against their shares in the building.
Also the OP does not need any disbursement from the property but the passive family member does.
Don't know if this changes anything?
What is a standard way to discount a non marketable interest in a company. Seeing how nobody is going to want to buy those shares, at least nobody in their right mind.
Intrafamily loans are a tax strategy that rich people use to help move assets/money between generations. The intrafamily rate is set by the IRS and is the rate of interest that a family member must pay the other for the money to be considered a loan vs. a gift.
You can setup the intrafamily loan with any sort of terms you want (interest only, interest paid up front, interest paid at the rear (most common), etc.), but the rate must be at least the intrafamily rate the IRS sets. Right now, because of the low treasury, the rates are stupid low.
in my example above, the loan proceeds would be used as follows: 3 million to the husband for his share of the company 1 million to 3rd kid 2 million to OP
In the background, the extra 1 million that the OP is using to buy out the husband is the 3rd kid's money that was lent by intrafamily loan. I was assuming that the OP wanted his full $2 million distribution on the loan, but since the OP doesn't really need to borrow the funds, loan proceeds would be as follows:
3 million to the husband for his share of the company 2 million to the 3rd kid 1 million to OP
However, since the 3rd kid needs money and the OP doesn't, then sizing the loan appropriately is really a function of how much the 3rd kid needs + the amount to buy out the husband.
So looking at my example above, say the the 3rd kid only needs 1 million. You can size the loan as 4 million vs 6 million.
The loan proceeds would be used as following: 3 million to the husband 1 million to the 3rd kid
In the background, what is happening is: OP owes 2.66 million of the loan (he is the 66% owner) 3rd kid owes 1.33 million of the loan (33% owner) Intrafamily loan of 0.33 million from 3rd kid to OP (which he used with his 2.66 million to buy out the husband)
At the end of the day, the OP is actually taking a loan against his shares. However, with the intrafamily loan, he can borrow 100% of the value of his shares (he is borrowing 3 million, just from two different sources).
There is no standard way to discount the value of the shares that I know of. It is really a negotiation between the OP and the husband. However, since the husband and OP are adverse, it doesn't sound like the husband has any intention of not getting his full share. Nothing you say or do is going to change that unless the husband really needs the money.
PS. At least now you know that you don't do friends and family deals without proper paperwork.
SB to you 10 times over.
This was extremely helpful.
I will try and bring this up. In the meantime what the Husband has been doing is shopping his shares whose prorata worth is about 1mm, He just doesn't want to take a discount(yet, he knows nothing about CRE and finance), and assumes that he can get his full value by selling to an interested party.
Asperiores suscipit placeat totam. Et voluptas id laborum et voluptatem explicabo. Et odit sunt eum asperiores velit sit tempora.
Aliquam similique fuga voluptatem quasi repudiandae. Aut cupiditate iusto aut ex consequatur. Voluptates molestiae eos vero est ut eos possimus. Iste error reprehenderit praesentium consequuntur. Numquam ut beatae voluptatem et quod.
Modi dicta et animi et cum et quibusdam. Eveniet id modi ex vero sed. Tempora omnis sed expedita impedit omnis veritatis molestias.
Et illum nihil eius et molestiae aliquid nihil. Et accusamus explicabo doloribus aut atque voluptates voluptates. Beatae quaerat quia praesentium voluptas ullam ut. Voluptas id sit voluptatum eveniet omnis excepturi delectus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...