The Challenge
A shareholder stepped away from day-to-day work at a closely held company. Before leaving, he stated in writing that he was keeping his ownership interest.
The remaining owners acted as if he hadn't. Almost immediately, they removed him as an owner and brought in two new partners in his place, without buying out his stake.
His counsel needed two answers. What was his interest worth, and what should he be paid for it? And was the company's own record of his equity even right? The other owners controlled the books, and our client had reason to doubt the numbers they were relying on.
Our Approach
We tackled the two questions in order, because the second affected the first.
First, we reconciled his equity. We rebuilt our client's equity account from the company's records: what he contributed, his share of earnings each year, and what was distributed to him. We tied each entry to tax returns, owner-level tax reports (K-1s), bank records, and the general ledger, and compared the results with the balance the company was reporting.
Second, we calculated his buyout. With an accurate equity balance in hand, we reviewed the company's governing documents for any buyout or valuation terms. We then calculated what his ownership interest was worth as of the date he was removed, using the company's financial records and the circumstances of his removal.
The Findings
- The records supported his continuing ownership. Together with his written statement that he was keeping his stake, the financial records gave counsel support for the position that his interest was taken without payment.
- The company's equity figure was wrong. The equity balance the company was reporting for our client didn't reconcile to the underlying records. Our reconstruction corrected it and documented each adjustment.
- The buyout amount was clear and supported. Building on the corrected equity, we arrived at a defensible amount owed for his interest, backed by schedules counsel could put in front of the other side.
The Outcome
With a corrected equity balance and a documented buyout calculation, counsel had a concrete number to negotiate from instead of competing claims about what our client was owed. The case settled.
Key Takeaway
When a shareholder is pushed out of a closely held company, two numbers matter: what the interest is worth, and whether the company's own records of that interest are right. Those records are kept by the people on the other side of the dispute, so they deserve independent scrutiny. Business valuation services can reconcile the equity, correct the errors, and calculate a buyout figure that holds up.
If your client has been removed from a company they still own a piece of, get the equity reconciled by a forensic accountant for business disputes before anyone starts negotiating.