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Thread: Selling membership in CC

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    Selling membership in CC

    We have a CC that is split into two people with 30% each and two people with 20% each. The CC owns a farm, which is not making any profits at the moment after three year drought. One of the members with 20% now wants to be bought out, or for the farm to be sold. The members made a combined offer based on what they can afford at the moment given the drought and the current question about land expropriation. The offer was deemed to be too low, and the member now wants them to sell the farm if they cant make the offer higher. My question is, if 80% does not want to sell, and the member does not want their offer, what happens now? Can the 20% member force the sale?

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    Assuming there is no contrary statement in an association agreement, then no the member can't. A 75% resolution is required to dispose of all or a major part of the corporation's assets.

    Also, if I understand your post correctly, the corporation will cease to operate it's farming activity?

    Regarding the offer; the member wishing to sell should offer his / her share to the remaining members and to the corporation itself. Only then can counter offers be made. Assuming there is a stalemate, then that's how it is and it remains unresolved. Again, an association agreement may hold otherwise.

    Does this member have a loan account?

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    No contrary statement in the agreement, and yes the corporation will cease to operate if they sell the farm. There is another small farm/land where two of the members who works for the cc has lived for over 30 years (family farm) that none of the 80% who grew up there wants to sell. The selling member inherited the shares, so no attachment to the small farm.

    The member did offer the shares to each as individuals and to the cc, but all the members said they were not going to make individual offers, but that the cc would buy them out and split the shares among the remaining members. The offer is not a bad one, but its not the full worth of the shares.

    No loan account, they were never really active in the cc to begin with.

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    Hi Carien

    Selling the property would require a 75% resolution. At this point the cc would have the money and could distribute it to all of the members in line with the % membership. That can' only be changed by it acquiring the unhappy member's interest, provided it meets the solvency and liquidity requirements in the Act.

    The alternative of the the remaining members collectively buy the minority is interesting, because both the offer and the amount required can only have the farm value as the underlying asset (the farm is no longer profitable) with no scope of future profits. In the coming era of appropriation without compensation it would be interesting to see what that value is. A farm is like any profit producing business; the value of the underlying asset is largely determined by the future profits it is able to generate .... Sentiment has zero value.

    But the easy answer to the first part of your question is a simple no, that member cannot force the sale and if the member is not owed anything the member also cannot suggest liquidation.

    As to what now? Nothing actually, it is a stalemate at worst.

    A third option that you have not mentioned is for the other members to consent to that member approaching 3rd parties, but the terms and conditions must be exactly the same as those presented to and rejected by you and the cc; those are your preemptive rights.

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    Silver Member Greig Whitton's Avatar
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    Quote Originally Posted by Andromeda View Post
    A farm is like any profit producing business; the value of the underlying asset is largely determined by the future profits it is able to generate .... Sentiment has zero value.
    The value of a business has more to do with free cash flows than profitability. A business can be profitable, but not particularly valuable.

    Founder of Growth Surge - Helping entrepreneurs create more wealth and enjoy more freedom.

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    The industry norm is earnings before interest, tax, depreciation and distributions, for a number of years. The number of years are usually what is negotiated. I guess a good EBITDA with a bad cash flow would be discounted.

    Under certain circumstances the price is more likely determined by the asset value such as when a buyer is looking for expanded manufacturing capability.

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    Hi,
    The 75% majority is how i understood the law as well, just wanted to make sure that by them telling the person to either take the offer, or wait until the farm starts making a profit again and then be bought out is not wrong.

    The whole appropriation without compensation is very big part of why they don't want to make a bigger offer.

    As for approaching a 3rd party to buy the membership %, I am not sure anyone will risk paying millions for a share of a farm that is currently not making a profit and with the current appropriation uncertainty and then to have a 20 % minority membership in a family business that share the other 80%.

    They do want to buy the other person out, and should it rain this summer they would most likely be able to make the offer much higher, but for now the piece of mind that they cant be forced to sell or liquidate is good enough.

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    Hi Carien

    Yes that's exactly what I thought would be the case.

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    Quote Originally Posted by Andromeda View Post
    The industry norm is earnings before interest, tax, depreciation and distributions, for a number of years. The number of years are usually what is negotiated. I guess a good EBITDA with a bad cash flow would be discounted.
    EBITDA is a decent starting point. But any serious valuation (e.g. discounted cash flow) is going to prioritise free cash flows. Obviously, nothing prevents a willing buyer and seller from agreeing to use a simpler or less valid valuation methodology.

    Founder of Growth Surge - Helping entrepreneurs create more wealth and enjoy more freedom.

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