By Maurie Cashman
This week weâ€™ll look at the incidents that can occur during the lifetime of a business that can be managed by a carefully designed and well-maintained buy-sell agreement. One agreement can impartially and fairly treat all parties when bad things happen.
Buy-sell agreements can be designed to handle the emotions that can arise when any of these events happen to the shareholders of a closely held company:
- Involuntary termination of a shareholder
- Divorce of a shareholder
- Death of a shareholder
- Disability of a shareholder
- Business dispute among shareholders
- Bankruptcy of a shareholder
- Sale of part or all of the company to a third party
- Retirement of a shareholder
You probably have no trouble imagining how most of these events (the death or disability of a shareholder, for example) could cripple your company or your family if left unaddressed. But some events, like the involuntary termination of a shareholder, are harder to grasp. Many owners donâ€™t anticipate that they might have to terminate the employment of another shareholder. In this case many difficult problems will arise. Is the terminated shareholder required to sell back his stock? Is the remaining shareholder or the company required to purchase it? In a divorce scenario do you run the risk of ending up with your co-ownerâ€™s ex-spouse as a new co-owner?
Here are some common problems that well-written buy-sell agreement can solve.
Sale of Part or All of Company to a Third Party
You receive a call from a competitor who would like to acquire your company. They make an offer that would guarantee your familyâ€™s financial security for life. When you talk about it with your ownership group, a 25 percent co-owner states that she believes we can take this company to the next level ourselves! You try to sell your stock to the competitor, but the competitor isnâ€™t interested in buying a part of your company. It is an all or nothing offer. Since your buy-sell agreement doesnâ€™t address this issue, the deal is off.
A well-designed buy-sell agreement can stipulate that when a third party makes a bona-fide offer to buy a companyâ€™s stock, the other shareholders must match that offer or must sell their shares to that third party.
Firing a Shareholder
Twenty years ago Joe, Sandy and Anthony left their employer and started their own company. The three equal shareholders knew exactly what theyâ€™d do differently and agreed on how hard theyâ€™d all work to reach their common goals. During the last five years however, Joeâ€™s behavior was becoming unpredictable. He missed important customer meetings, ignored his departmentâ€™s performance and finally, was arrested for attempting to purchase drugs from an undercover policewoman. The publicity was damaging to the companyâ€™s relationships with vendors and customers and to employee morale. Anthony and Sandy asked Joe to resign. He refused. They told Joe that heâ€™d have to leave and that theyâ€™d purchase his stock at the value agreed upon in the buy-sell agreement. Joe pointed out to his co-owners that their buy-sell agreement did not mention the involuntary â€œretirementâ€ of a shareholder and refused to sell his shares.
A well-designed buy-sell agreement can stipulate not only that a fired shareholder must sell his or her shares for the agreed upon value, but also that the remaining shareholders must pay for that stock.
Divorce of a Shareholder
When Jake and Don went into business 10 years ago, they agreed on nearly everything. However neither could imagine what the other one saw in the otherâ€™s wife, but had managed the situation by maintaining a polite distance.
One Saturday night, Jake called Don to ask if he could stay at Donâ€™s house because his wife had kicked him out. The following week, Jake was served with divorce papers and within days, Jakeâ€™s attorney scheduled a meeting with both men. Don was quite angry when the attorney told them that Jakeâ€™s wife wanted, and, in their community property state had a right to, half of Jakeâ€™s share of the company. If the three of them couldnâ€™t run the company together, Don would have to buy both of them out and Jakeâ€™s wife had an especially unrealistic idea of what her share was worth.
Jake and Don turned to their buy-sell agreement hoping it would cover this event. It did not. Their agreement did not include a divorce provision.
Next week, weâ€™ll talk about how changes in your company can turn the buy-sell decisions you made in the past into undesirable solutions today.