Most professionals working with small businesses have stories they hear from clients about bad situations that could have been avoided. Here are two that we’ve heard from our clients:
A substantial New York-based electrical contractor had two 50% partners. They started and grew the business over the years from scratch. Each has a lifestyle they never imagined could happen. At age 55, one partner passed away from previously undetected heart failure, and that’s when the troubles began. The partners had only an oral agreement that if one should pass away, the other would buy him out at book value.
The widow had buried her life partner and realized her main source of income was gone. She contacted her deceased husband’s partner for advice. He told her about the agreement he had with her husband. He let her know the amount of money he would be paying her. The widow told her children of the conversation. They balk at the amount involved. Enter the lawyers. The case still continues into year three.
Had the partners had a formal written and reasonable buy-sell agreement, this situation would never have happened. What constitutes a reasonable agreement depends on the company. Book value for a contractor is typically not a good indicator of company value. Engaging experts to determine a fair and unbiased value may have costs associated, but the surviving partner in this story has told me he regrets not having taken this step years before.
In the second situation, a Massachusetts boutique printing company started by parents employed their two adult children. All were very well paid. The son ran the company full time, the daughter contributed on a part-time basis.
After some time, the son convinced Mom and Dad to transfer 100% ownership to him, leaving Daughter out completely. He then proceeded to remove her position, eliminating a $400,000 salary. Here, too, the lawyers enter and the case continues at high expense. And it gets even uglier: As a result of feeling betrayed, the Daughter has forbidden her parents from seeing their grandchildren.
How did this happen, you might ask? The son told me he is still angry his sister took his teddy bear away when they were children.
A succession plan must be fair, as difficult as that process can be. Request our booklet Business Transition Planning: Maximize Your Legacy to see how this process can work best for you.