Bob’s Dilemma: How To Convert Highly Illiquid Assets To More Liquid And Easily Realisable

The following story is based on an actual series of events, with some names and circumstances fictionalised. Any similarity to any person’s name, character, or history is coincidental and unintentional. It is about how to convert highly illiquid assets to more liquid and easily realisable.

Bob and Leonard were the best of buddies. They did everything together in school and through university, including courting the same girl until she decided on Leonard, whereupon Bob graciously withdrew.

After graduation, Bob worked as a lawyer while Leonard became an engineer. After several years, Bob made a name for himself in law practice, while Leonard decided to leave his job and strike out as an entrepreneur.

With some inheritance capital and savings, Leonard bought a small but profitable boutique hotel in Kuala Lumpur. At the same time, he embarked on some small development projects building shophouses, small industrial lots and housing schemes in the Klang Valley.

Five years later, he had the opportunity to purchase a piece of land to build a 200-room resort hotel in Penang, and as this needed a substantial amount of money, he approached Bob to help arrange to finance. Bob recognised the project’s viability and managed to help him secure financing, as well as personally putting up 40% of the capital required by Leonard.

The hotel was completed and began making money consistently. The company that developed the hotel soon embarked on the construction of an adjoining tower of 150 apartment suites, which units were slowly released for sale.

No dividends were paid as profits generated from the hotel were ploughed back into the company to finance the apartment tower. Sales of the units had been strong, reaching 70% until the pandemic hit.

By this time, Bob was in his 50’s and thinking of retirement. During the pandemic, he started thinking a lot about succession. What if he passed on suddenly? How would his family access his assets?

Estate Planning Is Crucial: Learn How To Convert Highly Illiquid Assets To More Liquid

He reached out to me and got an estate plan worked out for when he was not around – some assets to be distributed through his will while some substantial ones were put into a living trust to be distributed in stages to avoid overspending by the beneficiaries. We didn’t discuss yet on the topic of how to convert highly illiquid assets to more liquid.

But what niggled him was the 40% stake he had in Leonard’s company. His family was unfamiliar with Leonard or his business. Bob realised that after his demise, the close relationship, trust and understanding between the two shareholders would be gone. Which was like saying the two shareholders would be strangers to each other.

He was worried that his stake, which was now substantial in value, may become worthless after his death in that his family, as minority shareholders, would not be able to influence dividend pay-out, if any, and the company’s direction. And no one other than Leonard would buy a 40% stake at a fair price.

He felt it would be difficult to impose on Leonard to buy his stake at a time when he needed to fund his business expansion. Hence he felt the need to convert highly illiquid assets to more liquid.

Convert Highly Illiquid Assets To More Liquid And Easily Realisable

He talked to me about his dilemma and wondered whether I had a solution. I inquired about the details of the company assets and realised that his solution lay on how to convert highly illiquid assets to more liquid.

So, I suggested that he propose to Leonard to swap his shareholding with unsold units that Leonard held. He gave a bit of a stunned reaction and said: “I should have thought of that.” And we both worked out what we thought was a fair exchange ratio, using cost instead of profit element (avoiding the need to revalue the hotel and apartment suites).

We then brought the idea to Leonard, who liked the idea of being free from pesky shareholders if Bob was no longer around, and at the same time, getting rid of unsold stocks. A buy-sell with a trust was set up with our trust company based on the transaction carried out according to the agreed exchange ratio upon Bob’s death or mental incapacity.

As it turned out, the solution worked after Bob had multiple strokes last year and had to be taken care of by his family, using proceeds from the sale of the apartment suites. Sometimes, I think the best solution is the simplest one.

In this case, it is about how to convert highly illiquid assets to more liquid and easily realisable.

About Rockwills International Group

Rockwills International Group, now in its 28th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and holds more than RM25 billion in assets under trust.