Legal Question in Business Law in Michigan

Major adjustments to balance sheet just before stock sale

I am selling my 25% stake to the 50% shareholder/president (S-Corp). I tried to get a buy-sell agreement drafted by an attorney years ago but they (president and CEO) wanted no part of it. ''We will be able to work it out'' (a small family business.) It was loosely agreed to 25% of yearend book value plus 25% of YTD net profit. The proposal reduced shareholder equity from $887,000 to $568,000 via 'adjustments' made 3 months after my request for sale. Much was writing off ''obsolete'' inventory. Most of which is not obsolete but just a slow mover (products are in our current catalog). They plan to move product to off site warehouse, not scrap. The next largest adjustment is due to our largest customer filing bankruptcy the day I left. $88,000 in receivables currently on the books is also being subtracted. There are also many other smaller adjustments (patents, prepaid trade show expense, etc.) Is it normal for these types of adjustments to be made right before valuation is determined? Similar adjustments were not made before I bought. A patent infringement by our president occurred before I purchased but was not settled and entered as a $250,000 liability until after I bought. Should there have been an adjustment then?


Asked on 5/25/05, 10:07 am

2 Answers from Attorneys
Blake Lipman Law Office of Blake P. Lipman

Re: Major adjustments to balance sheet just before stock sale

Without an agreement on how to value the business, any way of calculating the value could be arguably valid. If you feel you are not being treated fairly, you could sue to dissolve the corporation. That would probably get the majority shareholders' attention. They may decide to deal with you in a more equitable manner. For more information, please contact my office at (248)851-3171.

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Answered on 5/26/05, 8:01 am
Don Darnell Darnell & Lulgjuraj, P.C.

Re: Major adjustments to balance sheet just before stock sale

Book value is book value, and all necessary adjustments must be taken into account to determine an up-to-date true book value. While the bankruptcy loss would be appropriate, the loss for inventory doesn't really sound like a loss - but its hard to say with the limited information. Patents and prepaids would (or should) credits, and should work to your advantage. The old liability is probably moot, since I assume that you knew about the litigation when you bought in to the company.

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Answered on 5/25/05, 12:07 pm


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