Overview
Discounting the value of stock sold to management can be justified for several reasons:
Fulfilling a promise: If you made a prior commitment to sell stock to management at a certain price, discounting the value of the stock can be seen as honoring that promise. It could be based on previous agreements, contracts, or commitments made to management as part of their compensation package or as a reward for their contributions to the company.
Performance-based rewards: If management has significantly contributed to increasing the value of the company, such as achieving key financial targets, driving innovation, or achieving strategic goals, a discount on stock can be seen as a performance-based reward. It can align their incentives with the company’s success and motivate them to continue driving positive results.
Financial feasibility: In some cases, management may not have enough resources to purchase stock at the current market value without a discount. If the buyer has limited financial resources and will be using their share of profit distributions to service the purchase debt, a discounted sale price may be necessary to make the purchase financially feasible for them. This can help management participate in company ownership and align their interests with the long-term success of the company.
It’s important to note that discounting the value of stock sold to management should be done carefully, transparently, and in compliance with applicable laws and regulations. It should also be based on fair and reasonable justifications, and disclosed to all relevant stakeholders, including other shareholders, to avoid conflicts of interest and maintain transparency and fairness in the company’s operations. Consulting with legal, financial, and accounting professionals can be helpful in ensuring that such discounts are appropriate and compliant with relevant laws and regulations.
Transcript
Hi, this is Byron. I want to talk to you
about adjustments that we make to
business value
in our initial sale of stock to key
employees for our bankable exits. There
are three adjustments that we
commonly experience: the first is past
performance – key employee has impacted
the value of the company. Substantially,
there’s not been any equity sharing
arrangement and now the business
owner is looking to acknowledge all that
past performance. The second is a promise –
quite often business owners will get
excited in discussions with key
employees and say “Someday, maybe this
will all be yours” and we want to know
whether or not there’s been a promise
and there may be an adjustment to value
for that. And then, the third and most
common, is financial feasibility.
Since we’re using company cash flow and
we have very little in the way of down
payment, we usually have to adjust the
value down. But the advantage of the
feasibility adjustment is that we
recapture it when we ultimately change
control in the form of a Deferred
Compensation Plan.
