Obsidian Ignored & Rejected Offer

By Summit 1031 Bankruptcy

May 2009

In 1998, Dad and Brian Stevens, along with another LLC key member/manager, purchased a business that feeds and supports 17 of our community’s families. The company had increased sales from $500,000 to over $2 million a year. (The company borrowed money from Inland Corp. a while back in order to purchase equipment. The loan has since been paid off in full with interest.)

The key member wants to continue this business; however, Summit 1031’s Bankruptcy has put him in default on his equipment loans and is jeopardizing ongoing business. The operating agreement states that any transfer of an interest to a third party, without going through the process in the operating agreement, would result in the transferring members losing the interest. Dad and Brian owned two thirds of the company. They didn’t want any risk of a transfer causing the value of the company to be lost. None of this is of concern to Padrick and company.

This key member made an offer to purchase the business when Vance was still in charge. He had an offer in hand based on a valuation [name and last name omitted] prepared. [Name omitted] is a Certified Valuation Analyst and CPA in Bend. Besides the offer, this key member also agreed that he would renew a lease for the business at a very attractive rate. The building itself was also two-thirds owned by Dad & Brian. This was an appealing offer, as commercial lease rates for industrial property had fallen substantially. A lease from this business (which leased the largest part of the building space) would help retain the value of the building through a very poor market. I’ve seen industrial rates down at 25 cents/sf. recently. It would be a disaster if the building was out of this 70 cent/sf. lease.

Terry Vance met with this key member. After considering the offer, Vance told him it was too low. Vance countered with an offer twice what the valuation had determined the company was worth. One of the valuation issues at hand related to the downturn in the economy. Sales had decreased dramatically in the late summer and fall of 2008. The key member said there was no way he could purchase it at that point, and he would just hand over the company. This was not good because he is the key to the customers and the development of new product. You see, this business is a specialty business with a certain market. You know the old saying, “everyone is replaceable”. Well, he is one of those guys that could be the exception. The chance that the business would fail without him is high. In fact, when a broker was asked about selling the company over a year ago, he said the company wasn’t as valuable because it didn’t have a management team that could carry on with the business under a new buyer. He said the key to selling the business would be that this key member would have to agree to stay on for at least a year until the new owner could work into the company.

The key member told my dad that he would not buy the company out at Vance’s price and that they would need to find an outside buyer. That was not going to work. The key member knew it and so did my dad. My dad suggested that he sweeten the offer. Dad and Brian also owned some industrial lots in Brinson Park with the key member. Dad suggested he include his interest in the lots with the offer. The key member didn’t want to pay more than the valuation, but to get the thing settled, he would agree to do that. Dad presented the idea to Terry Vance and Vance said to have him make the offer and he would consider it. Vance never got a chance to address the new offer as he was thrown out and Padrick was inserted as Vance’s replacement.

In the three months that passed, Obsidian failed to address the offer. Shortly thereafter, Ewan Rose called the key member and told him he should hand over the financial statements now, or in four weeks Obsidian would own two-thirds of the company and he’d just get them himself. That’s a great start to dealing with the key member that you’re going to need in order to get the best value out of the business. This key member has hired counsel to fight Obsidian. He had to use LLC cash to retain counsel and that will result in the creditors spending more legal fees to try to figure out how to get value out of the business and the building. There may be some serious issues since the transfer was not done through the operating agreement. Once again, the principals’ wishes are that their share of the company’s reasonable value provides funds to help pay the exchangers, and that the innocent members are not negatively affected by the whole situation.

After ignoring the first offer, in early May the key member submitted another offer and it was rejected without any counter offer. I was told this key member then met with Obsidian on May 30th. He said Obsidian countered with a price that was $1 million higher than his offer. He was also told that they need to figure out if he profited from what happened at Summit. Five years down the line, everyone will know that none of these innocent investors profited from Summit, but by then all the money and value that is in this bankruptcy estate will have been lost.

“Click here to see another offer that was ignored by Padrick” [ http://www.summit1031bkjustice.com/?page_id=692 ]