If you plan to live forever, never get sick or hurt, never quit, never get fired or never sell your business, you need not read any further.
For the rest of you who live in the real world, and especially those involved in a business partnership, one or all of these issues is sure to arise at some point in your career. Most likely, it will happen when you least expect it.
”It is predictable that these events will happen to different people at different times,” says Marc Morgenstern, managing partner of Kahn, Kleinman, Yanowitz & Arnson Co. LPA. ”The question is, ‘Do you want to live life intentionally?”’
Death, disability, dismissal, dissolution and disagreement will happen in any business, and it’s often a difficult time. Since it’s impossible to always control what happens, the only other option is to plan for these things. That is where buy/sell agreements come in, says Morgenstern.
”Not all partnerships are made in heaven, and all jobs are not for life, he says. ”While addressing the problems may not make it a good set of circumstances, not addressing them makes it a disaster.”
Most closely held and smaller businesses are not designed for passive or unwelcomed shareholders. Buy/sell agreements are put in place so that when the unexpected happens, the expected outcome prevails.
The first scenario a buy/sell agreement should address is the death of a major shareholder. In this case, the agreement sets a fixed buyout of the shares back into the company and is often guaranteed by an insurance policy that pays for the buyout.
This is the easiest of the inevitabilities to deal with, Morgenstern says.
”Death is easy to deal with financially, very difficult emotionally,” he says.
Just a flesh wound
On the other end of the spectrum is disability.
”There is not much of an argument about death, but what constitutes disabled is not so clear,” Morgenstern warns.
There is physical disability and mental disability. Neither is defined, and there are very few insurance policies — all expensive — for long-term disability. Getting everyone to agree on what is a disability and what is not can be quantified by time away from work or based on a third-party opinion.
You can’t fire me, I’m an owner
Firing a shareholder is another ambiguous area. There are two ways to fire someone — without cause and for cause.
”Everyone agrees if you do a bad thing you should be fired,” says Morgenstern. ”But that is not so easy. The question is, ‘What constitutes a really bad thing?”’
He suggests setting guidelines but ”make it as conceptual as possible.” The subsequent buyout should have a stipulation that includes either paying less money for the stock or having a longer noncompete agreement.
”There is an air of punishment, and the company is able to cut a different deal,” he says. ”It often includes two to 10 specific things, including failure to perform one’s job.”
50 ways to leave your job
It may be hard to believe, but there have been situations in which shareholders decided that working was no longer for them. When one shareholder unilaterally changes the rules of the game, a buy/sell agreement should be able to cut them loose.
Losing even one partner can adversely affect a business and, as Morgenstern says, ”Absent an agreement, if you ever sell the company — regardless of their contribution — what they get is their equal share of the (proceeds).”
Selling and going public
Most shareholders benefit most when a company is sold outright or taken public. The problem arises when not everyone involved wants to sell or go public.
The question a buy/sell has to contend with is what majority and on what terms can a company be sold.
”If the business is going to be sold, there are two kinds of situations,” says Morgenstern. ”There are drag-alongs and tag-alongs. If an agreed percentage decided to sell, and if that percentage agrees to sell, then everyone agrees to sell for same terms.”
Talking or thinking about the inevitabilities addressed in a buy/sell agreement is time-consuming and usually unpleasant. Morgenstern likens it to bringing up a pre-nuptial agreement to a young couple about to get married.
”They think they will live forever,” Morgenstern says. ”They think their business will succeed and their partners will be their partners forever.”
For most business owners, being so proactive goes against their grain.
”You are asking them to deal with the expectations of nonsuccess.” How to reach: Kahn, Kleinman, Yanowitz & Arnson Co, (216) 696-3311 or [email protected]
Kim Palmer ([email protected]) is managing editor of SBN Magazine.