Have you taken the steps necessary to protect the value of your business?
I hope so.
Our client in the manufacturing industry - a producer of bolts, screws and fastening supplies - did not.
How could that be?
For starters, the majority owner thought it unnecessary as he enjoyed a "great" relationship with his partner's family, and vice versa.
He felt that "if" the day came when one of them would be incapacitated that it would be simple and straightforward to treat each other's family fairly.
"Fairly" was never defined.
One day, the "if" occurred...a medical diagnosis that indicated a long life span was most likely not in the cards.
By then, too late. No life insurance company would insure the life of the partner. Nor, would a disability carrier.
What happened next could have been predicted. The partner died.
The family of the departed apparently did not have as "great" of a relationship with the surviving partner as that partner once thought.
The deceased's family retained an attorney and commenced their own due diligence on the books and records of the Company.
There was no shareholder redemption agreements ever prepared to offer guidance on the method to determine the Company worth. That was a problem.
Another roblem was funding. Once a valuation had been calculated and negotiated, how was the family going to get paid? There was no "tax free" life insurance proceeds to distribute.
This led to another problem which threatens the future viability of the Company. It had to leverage its' Balance Sheet by depleting cash and future cash to pay off the value of the deceased's stock.
It could not use this cash for productive purposes like hiring team members, expanding product lines, investing in capital equipment.
Although this was predicted it could have been prevented.
How? Upfront....
1. A trusted business attorney to prepared and execute Shareholder Redemption Agreements.
2. An agreed upon business valuation.
3. A properly funded life insurance policy on the commensurate value of each shareholder's interest.
Have you taken the steps necessary to protect the value of your business?