FAMILY BUSINESS SURVIVAL—HOW BUY-SELL AGREEMENTS CAN RESOLVE COMMON CRISES
By Phillip M. Perry
Family businesses can find their future imperiled when an unanticipated crisis such as death, disability, or divorce affects the ownership of corporate shares. A “buy-sell agreement” can ensure the survival of the organization by mandating the terms under
which shares are bought and sold, often preventing a controlling interest from passing into third party hands. Periodic business valuations will not only facilitate the required transfers of corporate stock but also encourage family members to look on their enterprise as a long-term financial investment.
A California-based family business was facing the worst crisis in its history. Not only was its founding patriarch and CEO starting to exhibit signs of mental deterioration, but his erratic behavior was threatening the bottom line. Business decisions were being neglected. Customers were being mistreated. Top employees were headed out the door.
With the future of their company at stake, the other family members at the third-generation enterprise realized they needed to find answers to three questions: How could they convince the CEO to relinquish control before he damaged the organization irretrievably? Who would shoulder his responsibilities? And where would they find the money to purchase his corporate shares?
Buy-Sell Agreements
Our opening story is not unusual. Family businesses everywhere can find their future imperiled when a critical shareholder can no longer exercise managerial duties. Sometimes the cause is physical or mental disability. Other times it is an unexpected death, resignation, termination, retirement, or divorce.
Luckily, the California business was able to resolve its crisis by resorting to a tool available to family businesses everywhere. A document called a “buy-sell agreement,” drawn up years earlier, mandated the terms by which the family business stock was bought and sold and the procedures for responding to unexpected events threatening the organization’s survival. In this case, the document required performance-based assessments of the CEO’s mental competence.
118
“A good buy-sell agreement can shelter a family business from costly disruptions caused by material events involving its owners,” says Sam Brownell, founder of Stratus Wealth Advisors in Kensington, MD (
stratuswealthadvisors.com). “Te right provisions can even keep company shares from falling into third party hands—an event that can damage the organization’s profitability or even threaten its survival.”
Out of the Blue
Family business crises are noted for their unpredictability. Here are just a few examples of some other “trigger events” that can put the bottom line at risk:
Divorce A family member’s divorce settlement grants the ex-spouse a batch of company shares—and a measure of unwelcome control over business decisions. Te business faces a costly forced valuation and a search for cash to recapture stock. “When a member of a family business sues for divorce, very often the spouse’s attorney will try to attach company stock,” says John R. McAlister II, Vice President of Te Beringer Group, Radnor, PA, a family business consultancy (
theberingergroup.com). “It might also come to light that the spouse had been gifted some stock during the marriage.”
Personal bankruptcy A family member with a large portion of the company stock runs up excessive credit card debt. When the creditors start to eye his shares as part of a bankruptcy settlement the business risks losing substantial operational control to outside parties.
TPI Turf News November/December 2022
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140
