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Can You Afford to Watch It Go Up in Smoke?

Covid has wrecked his business. Paul (not his real name) owns a company that is a leading player in Nashville’s trendy food scene. As everyone knows, the restaurant sector has been decimated by pandemic-driven shutdowns.

To raise cash, Paul asked me to help him sell a minority interest he owns in a business in Texas. Paul was hoping the proceeds from selling that minority interest could be reinvested back into his food business in Nashville.

More times than not, the best buyer of a minority interest in a business is the owner of the majority interest in that business. I asked Paul if he had talked to his business partner about buying his minority share. “We talked about it but he won’t make a commitment given some uncertainty in his world, too. That’s why I just need to go ahead and sell my interest.

I then asked Paul about the financial condition of the business. “I am considered a silent partner in the business, so the majority owner doesn’t show me the financials.” I almost spit out my coffee. “Say what? You don’t have access to the financials? That should never happen,” I said.

Paul went on to explain the circumstances which led to his investment in the Texas business. Long story short, Paul was trying to help his friend, but after a few years, the friend seemed to resent Paul’s involvement in the business, so he essentially cut Paul off from the information flow. “He tells me we haven’t been profitable in years, but he sure lives a lifestyle to make me think we’re successful,” Paul told me.

While I hate to be the bearer of bad news, I had to tell Paul he had few to no options. Yes, there are legal options to force the partner to share information, but that doesn’t solve the problem of needing to sell the minority interest, nor does it address the reality that it might not be worth much. Simply said, legal recourse was not an option to solve Paul’s immediate problem.

So here’s where things stand. Paul doesn’t know the value of his minority interest but even if he did, he couldn’t sell it. Who is going to buy a minority interest in a business when the majority owner won’t share the operating data?

Regular readers of this bi-weekly newsletter know that I am not a fan of minority investments in a business. Unless you define terms of when and how the majority owner will buy your minority interest, please don’t make a minority investment in a privately held company. Unless that is, you can afford to watch it go up in smoke.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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