KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Calculating the sale and purchase of selling shareholder’s interest / webinar registration
April 23, 2022
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Calculating the sale and purchase of selling shareholder’s interest
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Stockholder agreements in close corporations [non-public and generally shares held by small number of shareholders, more than 2 and less than 35, typically] will commonly address the sale of a shareholder’s interest in the corporation. [a discussion of an interest in an LLC would be similar].
A sale of the interest can arise in several ways:
* disability
* death
* unable to meet capital calls [if required in the shareholder agreement]
* voluntary withdrawal; retirement
* involuntary withdrawal; age requirement in shareholder’s agreement or forced out by remaining shareholders
The shareholder agreement will typically have a formula to calculate the selling price; the value of the selling shares. It’s common to fall back on established accounting principles which will account for capital contribution, assets, liabilities, all of which are calculable by an accountant. The calculation may or may not include a calculation for “good will”, which includes, among other things, reputation, brand, intellectual property, and commercial secrets, all of which lends itself to subjective evaluation which leads to disagreement.
In the alarm industry the good will should encompass the alarm contracts and the recurring monthly revenue required to be paid pursuant to those contracts. If the business has been successful it’s this category that is going to add the significant value to the selling price. Technically this asset is “recurring revenue for future services”, which means the portion of a company's revenue that is highly likely to continue in the future; This revenue is predictable, stable, and can be counted on in the future with a reasonably high degree of certainty. In the alarm industry we refer to this revenue as RMR, because we calculate it on a monthly basis, no matter how it’s invoiced. To qualify this RMR must be “under contract”. Predictable RMR that is not under contract has little or no value in the alarm industry.
When calculating the value of an alarm company we apply a multiple to the contracted RMR. That multiple can range from less than 18 times RMR to over 40 times RMR, so there is obviously a great deal of subjectivity involved in arriving at a “multiple”.
Now back to the shareholder agreement. Keep in mind that the shareholder agreement is usually an agreement made among friends [another relative term], relatives [perhaps also relative term] and more to the point, people that are talking directly to each other rather than through their respective attorneys. So the shareholder agreement is an agreement that should be discussed and agreed upon by people who are friendly with each other and optimistic about the business they are about to start or memorialize their relationship in a business that is successfully operating.
If you look at the times when selling shares may arise you can easily see that in many situations not all shareholders may be equal, and what I have in mind is age, health or differing interests. Two shareholders may be able to predict which shareholder is likely to be the one who is selling; the other buying. Sure it’s a gamble, but sometimes disparity makes it a better than 50/50 bet. When that’s the case they may have different views on how to value the selling shares.
For example, close analysis may reveal that the selling shares should be priced differently for each or at least some of the contingencies mentioned above for selling. Let’s assume the alarm business has been operated using all the best practices I dwell on in these articles. We would hope to get 36 times RMR for this company if selling to another alarm company. But is this the selling and buy-out multiple that the shareholders want to use when they aren’t selling to a third party, but selling among themselves for any of the contingencies calling for a sale, such as disability, death, etc? So the shareholders may want to agree that a disabled shareholder or deceased shareholder be paid based on XXX multiple, a shareholder who wants to retire XX multiple and a shareholder booted from the business X multiple. Or, they may not want any different calculation. A young healthy shareholder may want a lower selling price than an older shareholder, figuring that he is going to be the one buying. But that same young shareholder thinking he’d rather be a cop and already has his application in, may figure he may be the one selling, so he wants the higher calculation. There are many scenarios that can influence how a shareholder will want to calculate the selling price.
Don’t make the mistake of delaying addressing these issues in a shareholder agreement because if the time comes when you are forced to address a buy-out it’s going to be much more difficult to reach agreement at that time. Shareholder agreements will run you from $1000 to $2000, so now you don't have to ask. Contact me directly if ready.
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Webinar on assistance getting licensed
Webinar Title: Filing for and renewing your alarm license
Topic Details: Once you know where you need the license and what license you need, and you know you’re qualified, The Cmoor Group handles the minutia details filing for the license and has the software to monitor for renewal compliance.
When: May 3, 2022 at 12 PM ET
Presenter: Connie Moorhead, President of The CMOOR Group. connie@cmoor.com or call 502-254-1590, ext. 101
Hosted by: Ken Kirschenbaum,Esq
Who should attend: license holders, license compliance officers, owners, managers
Register Here: https://attendee.gotowebinar.com/register/8242655366269110283
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To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com
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CONCIERGE LAWYER SERVICE PROGRAM FOR THE ALARM INDUSTRY - You can check out the program and sign up here: https://www.kirschenbaumesq.com/page/concierge or contact our Program Coordinator Stacy Spector, Esq at 516 747 6700 x 304.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com
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