Situation: A company has been in business for 38 years. The majority owner founded the company. One of two minority owners has obtaining her share position through sweat equity. Another minority owner is on the Board but is not involved in the day-to-day operations. There are buy-sell agreements in place to preserve the interests of the three owners. In the case of an exit how do the minority owners preserve the value of their shares of the company? How do you preserve exit strategy value as a minority owner?

Advice from the CEOs:

• Details of the current arrangement:
  • All partners are currently capped at 33% ownership.
  • The expectation is that in 10 years the two minority owners will buy out the principal owner and split ownership between themselves.
• It is far better to negotiate potential ownership position up front – at the time of entry into a business, rather than along the way. As this apparently was not the case the minority owner has two points of leverage:
  • The minority owner has a good relationship with the principal owner, a very important factor, and the owner cares about the minority owner.
  • As the minority owner develops a track record of success, this should be leveraged in addition to the relationship to assure that the interests of the minority owners are preserved.
• Additional key points of leverage of the minority owner asking the question:
  • The option to walk away as principal manager of the business if not happy with the situation.
  • Upside value of the company.
  • The desire of all owners to maintain their current life-styles, which are dependent on income from the business.
• Separate management and control of the business entity from day-to-day operations. These are distinct and different areas of focus.
• Another option to consider is the use of insurance policies to fund a buy-out of the majority owner.

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