Service: Business Continuity
Business: Energy Wholesaler
Ownership Structure: Privately-held, family-owned
“I have the perfect tax plan: stock out of my wife’s and my estate – one third to each child.”
Situation
Twenty years prior to our initial meeting with the company founders (husband and wife), they had placed 1/3 of the company’s stock into trust accounts for each of their three children. The trusts were controlled by and voted on by the trustees (in this case the parents/founders), until each child reached 35 years old, at which time the Trust would release stock directly to the child. The parents’ desire was for active shareholder(s) to control the company. At the time of our initial meeting, all three children were in their 30’s.
Issues
Over time, “Active” vs. “Inactive” shareholder rivalries emerged, as one child was active in the family business and the others worked in different professions. The active child tripled the size of the business within 10 years, and due to the capital needs associated with the company’s growth, no dividends were paid. “Inactive” shareholders and their spouses pushed for cash flow from the stock or a company sale. The parents/trustees always told their children, “Pay the price and you will participate.” They wanted the active child to own the company going forward and knew that once the trusts released stock to the children, the “Inactive” shareholders would sell the company.
Solution
While consulting with the family over a period of time, we were able to get all parties to communicate and address the key issues, focusing on what was right for the business first. We were able to arrange a mutually agreed upon buyout of the “Inactive” shareholders by the “Active” shareholders before the trust release dates. Cash flow was managed in a way that the company could continue to flourish, and the parents were pleased that active shareholders remained in control of the company with majority ownership.