The Business Ownership Transfer Matrix and the Law of Unintended Consequences

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Beyond a shadow of a doubt, if you own stock in a closely held or family business today, there will come a time in the future when you do not own or control it. This Valuation Video examines the Business Ownership Transfer Matrix that dictates that you will sell or transfer your shares, either partially or totally, and either voluntarily or involuntary.  If you don’t plan ahead, the Law of Unintended Consequences may come into play. When you transfer stock involuntarily, you lose control over what happens, and things can happen that you didn’t intend.  Promises may not be kept, estate taxes may be maximized, control may shift unexpectedly, and on. So plan ahead!



Beyond any shadow of doubt, if you own stock in a closely-held or family business today — if your clients own stock in closely-held or family businesses today —there will come a time when they will NOT own it or control it. The question is, how will they transfer that stock? How will they sell that stock?

This Valuation Video — I’m Chris Mercer — could be called “The Ownership Transfer Matrix and the Law of Unintended Consequences.”

If you have stock in a closely-held company, you’re going to transfer it, either partially or totally, and either voluntarily or involuntarily. There’s really no way out of the boxes. Now, there are a number of ways that you can transfer stock and some of them are in the boxes.

For example in the voluntary/partial transfer, you can have a company repurchase some stock, or give it to the children. Selling to other owners would be a possibility. A sale to an ESOP would be another possibility. And you might even do a merger and keep some stock so that you get partial liquidity, perhaps. On the total side, you can sell the business for cash or for notes or whatever. You can do an installment sale to the children. You can do an ESOP or you can do a company repurchase of stock and you can get liquidity. You’ll have partial liquidity or total liquidity.

Now, what happens in the partial/involuntarily box? You might divorce and have to give up some of your stock. You might have a shareholder dispute, and legally the stock is taken away from you in a squeeze-out merger, for example. Now on the involuntary side and with total transfer, if the horse you’re riding falls down or dies, you’ve got to get off. Well, you’re going to die someday, and I’m going to die someday. And when death occurs transfer occurs, shareholder disputes, and buy-sell agreements.

Now, there’s no way out of those boxes. I will say, these little bullets up here indicate where appraisals are needed or required in a lot of these transfers. And they’re desirable in the remainder of the transfers. So if you’re going to plan to transfer your stock, if you’re going to plan on how to manage the wealth that you have accumulated, you might as well get a regular appraisal — and maybe for your buy-sell agreements, for example, I’ve written books about that.

So if you don’t plan, what happens is that the Law of Unintended Consequences can come into play. What is the Law of Unintended Consequences? Those are the things that happen when you don’t do what you think you want to do, when you defer and wait. For example, if you die unexpectedly you may have promises unkept to your other shareholders or to your children. A control appraisal will be required if you still have control of the company — that’s for estate tax purposes — and you’ll have more estate taxes than necessary. The buy-sell agreement that you have in place may be in operation, and that may change control, and you didn’t intend for that to happen. The estate may lack sufficient liquidity if you died unexpectedly. Alternatively, you can become disabled. You can divorce. In a recent case, a gentleman had a lot of stock in a successful closely-held business. He was divorced. They didn’t have a lot of other assets. So he lost half of the stock because he couldn’t afford to buy it. He couldn’t control it. So you can lose significant value when you can’t afford to keep the stock.

Missed opportunities because of lack of preparation. And an unexpected offer could come along, in which case the stock may not be where you want it. You haven’t given it to your children or put it in a foundation. You haven’t given it away. You haven’t done what you want to do and you may have promises unfulfilled.

I said you’ll give up your stock voluntarily or involuntarily. If you don’t plan, chances are that you may find yourself in a position where you’re going to do something voluntarily, but you’re under distress, or you’re under a little bit of motivation, or under pressure to get something done.

So in this Valuation Video, we have talked about the Law of Unintended Consequences and the Ownership Transfer Matrix. We have four boxes up here. You can’t get out of the boxes. You’re going to transfer your stock, one way or another, so you might as well plan for it in advance — a regular appraisal of your business is an excellent tool in managing the wealth and helping you to decide when and how to make transfers.

Chris Mercer here from Mercer Capital’s worldwide headquarters in Memphis. I look forward to talking with you about the Ownership Transfer Matrix, or the Law of Unintended Consequences, or business valuation in general. Give me or any of the professionals at Mercer Capital a call and we’ll be happy to work with you.

Until the next time, good day!

Please note: I reserve the right to delete comments that are offensive or off-topic.

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