I have a client that is wanting to sell his 80% interest in his S Corporation to the minority 20% shareholder. The 20% shareholder does not have the ability to pay/finance the purchase. I think there are really only two options: bonus out the income to the minority shareholder and have her use that money to purchase the stock personally. The other option is to have the Corp. use the cash remaining at the end of the year to buy back the stock (treasury stock). How would most of you structure this transaction and why?
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Just curious...
Is the minority shareholder a related-party? I would be interested in the answer to that question before I would look at possible scenarios.
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I should have also mentioned that the intent is to sell the stock over time (as cash flow permits).Originally posted by Hamacher View Post
Seems if the bonus out the money, they would be incurring additional medicare and workers compensation insurance.
If they corporation redeems the stock, it seems that the seller will have capital gain until all of the stock is sold (outside basis is $0) but then will have a loss on the final K1 for the undistributed inside basis which will be limited to $3,000 per year - IS THAT CORRECT?
I am not sure why this is so difficult to think through. It must be getting late. Thanks in advane for the input.Comment
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Why doesn't the departing shareholder just sell his stock to the remaining shareholder and finance the purchase? The interest rate could be set on the high side of fhe market rate as an inducement for the purchaser to pay off the loan as quickly as possible. It would certainly be helpful if the first year payments are sufficient to cover the tax liability, but that isn't a controlling factor unless the departing shareholder needs it to work out that way.Last edited by JohnH; 03-05-2012, 09:50 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Not a bad idea
Not a bad idea... I think they were just trying to make it as flexible as possible (i.e. buy back as cash flow permits). The majority shareholder created the company but is now hands off and is trying to help out the minority shareholder. I guess the only concern that I would have for the seller is what if the buyer doesn't pay him. What would be his recourse?Originally posted by JohnH View PostComment
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Recourse probably depends primarily upon the net worth of the purchasing shareholder. I'd want a personal guarantee in addition to a stock restriction, because even though the stock can stand as security for the loan, it probably wouldn't be worth much if the business got in trouble. He might balk at a personal guarantee, but that's essentially the same thing he would be doing if he qualified for a bank loan to buy out the departing shareholder. In essence, the departing shareholder is standing in the bank's place, so he should expect to at least have the same security a bank would require.Last edited by JohnH; 03-05-2012, 10:10 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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She really doesn't have any net worth. To put this transaction into perspective... the company is worth about $2 million. The cash flow of the company after distributions to cover taxes of the shareholder is about $400,000. I think the seller is not wanting to deal with issues that may arise if she doesn't honor the note. He also has the sale structured allowing him to receive more money as the company sales increase.Originally posted by JohnH View PostComment
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Even if he doesn't want to deal with issues arising if the buyer doesn't make the payments, he will have to deal wiith them in some manner. He will either forgive the future payments or hold someones feet to the fire. A personal guarantee helps to do that, even if he doesn't intend to follow through in the event things unravel. It's a strong motivator to keep the purchaser focused, and it keeps some control where it belongs until the seller is paid off."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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I agree but there is also a chance that the company could be bought out for a great deal more than what his is offering to sell the company to the minority shareholder. That is another reason he is not wanting to give up all of the shares for a note.Originally posted by JohnH View PostComment
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So it looks like he should sell her up to 49% and finance it for her over ?? years. Once she has paid for that (possibly from a combination of part of her after-tax salary and her prortionate share of distributions) , then he can decide how to move forward. Until that happens, he is still in control.Last edited by JohnH; 03-05-2012, 10:31 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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He's made if pretty clear that he isnt going to take a note.Originally posted by JohnH View PostComment
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He also could just keep his 80% share, if cash flow over time is what he wants. The 20% shareholder has an incentive to make the company profitable so she has more disposable cash to buy shares from 80% guy over time. If she's a dud at running the company, major stockholder still has his stake and can step back in or sell some or all of his shares to someone else.Comment
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