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Merger of Companies
Expert: Kevin Tribe
I have 2 companies, one which I own 100% (company A) the other I am 50-50(company B) partners with someone. My partner of company B and I decided to merge both companies, therefore company B will purchase company A. Company "A" is valued at $100,000 but the partner of company "B" believes that $50,000 should be the price paid to me because technically I'm paying for my own company. I believe it should be the full amount of $100,000 because it's still two separate companies and not the individuals that are paying. Who's right?
Kevin Tribe answered:
While the question appears somewhat confusing it's a simple issue which is more easily understood if you imagine this as separate companies with no common shareholder. The facts are:
- Company A has a shareholder who wishes to sell 100% of their shares to company B.
- Company B needs to pay the shareholder for the shares in cash.
The value has been established at $100k.
- There will only be one combined company remaining after the transaction.
- The buyer is Company B, and the seller is the individual. Company B needs to write a cheque to the shareholder for the full value of the shares ($100k).
The confusion may be around where the money is coming from. If company B doesn't have the financing available, then the shareholders will need to invest more money in their joint company. They would each personally invest $50k into company B which in turn writes a cheque to the shareholder of company A for $100k. In this case the shareholder of company A only ends up keeping $50k after the transaction is completed, however it is still necessary for legal, tax and likely shareholder agreement issues to follow the above steps. There are alternatives on how this might be structured and a good advisor can decide the right way for your particular situation.
About the author
Kevin Tribe is a partner in Pivotal Decisions Inc., a merger & acquisition intermediary assisting the executives of North American I.T. and high tech companies. Their primary focus is finding strategic buyers offering maximum valuations for shareholders.
Their website is www.pivdec.com.