What Happens When an Owner Dies Without a Buy-Sell Agreement
Not having a buy-sell agreement doesn’t mean anything UNLESS a co-owner dies, becomes disabled, becomes bankrupt, divorced, wants to quit, retire or many other things. Recently, I received quite a few calls from accountants with clients that need valuations because a co-owner had died suddenly without a buy-sell agreement, prompting this blog. Here is a bleak picture of what happens and what canbe avoided.
The scenario being used is a business owned by two friends that started it 20 years earlier. They are pretty successful and make good livings, fund their pension plans, have money left over each year to provide formodest growth, but they haven’t accumulated any extra savings and they each still have home mortgages and kids in college. They are both 50 and one dies suddenly. The survivor will have to buy the interest from the estate of his deceased partner but doesn’t know what to offer and cannot afford too much. Now, the problems and costs begin.
The business accountant is asked to determine what the widow should be offered and he comes up with a reasonable amount but the survivor doesn’t know how he could manage the payments unless it can be spread over five or six years. This has to be discussed with the widow, but first, the survivor needs to make sure the business stays on track. These are some of the things he has to deal with right away:
- His hours jumped up and alsoincluded the need tostart earlier and go home later
- He has to hire someone to replace some of the work the partner was doing
- He has to find out all the nitty-gritty his partner was doing and start doing it
- Customers need to be contacted that business will be as usual
- Some of the employee responsibilities need to be shifted and more time needs to be spent managing the staff
- He has to assure suppliers of the continued viability of the business
- He has to meet with the bankers to comfort them
- He will also need to spend time with the accountant to discuss cash-flow
Now, the survivor finally meets with the widow who tells him she hired an attorney to advise her and she will leave the buyout to her, the one who “understands how these things work.” Her attorney questions the ability of the accountant to value the business and his objectivity. The attorney tells the widow that she would need a valuation prepared by an independent business appraiser that she could refer. A comment here is that it would not be responsible for the attorney to advise her client without the valuation. However, this is a costly and time-consuming process and the attorney says that she will also need to engage an accountant to audit the books or minimally, oversee the business to make sure funds are not being diverted. She says, “It is my responsibility as your attorney.” And you know what? The attorney is right.
Meanwhile, whatever valuation amount is concluded, it will likely be much more than the survivor could manage. So, the survivor will need to engage his own attorney and another appraiser to rebut the first one. This process will drag on at least six months and likely longer. Also, the relationship between the two families has deteriorated and they would no longer speak. A twenty-year friendship is down the drain along with at least $25,000 of costs and a declining business with doubt as to its continuity.
It there was a buy-sell agreement, the price and terms would be clear, likely manageable and none of the time dealing with the attorneys and accountants would have been needed to be spent along with the extra fees. Also,the time would have been devoted to keeping the business going.
Conclusion: If you and your partner are still living and are not disabled, it is not too late to get a buy-sell agreement. Get one! Two blogs to help you are at https://partners-network.com/2013/03/05/buy-sell-agreement-drop-dead-plan/ and https://partners-network.com/2013/03/07/valuation-for-drop-dead-buy-sell-agreement/
P.S. If you do not get an agreement done, and if the unthinkable happens… then, this blog will become your story.
My next blog will offer a suggested buy-out plan where there is no agreement.
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