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 valuation and closely held
businesses. The most common method of
evaluation that we see for operating
companies, other than general contractor
construction, is the multiple earnings of method of
value.
Let me explain. The multiple earnings
method is where
the company is being valued based upon
its ability to generate earnings into
the future at a rate that is equal
to or greater than the earnings are now.
Typically, what they’ll do is take the
last three to five year earnings, average
them out or assign a weight based upon
the significance of any one year,
and then there will be a multiplier
applied to those earnings, for example
four. So in a case where a company had an
average earnings of five hundred
thousand dollars and they use the four
multiple, then they would project the
value at two million dollars.
It’s not an exact science but typically
it’s the most common method that we see.
