The Situation

Bill and Jeff were very good friends when they started a professional services firm more than 25 years ago. While the business was incorporated, there was very little documentation of their business arrangement. As Bill told me, “We started the business on a handshake and ran it that way for over twenty years.” There was no buy-sell agreement and no formal indications of the value of the business. But both Bill and Jeff thought they had a pretty good idea of its value.

After more than twenty years of running the business casually, Bill and Jeff were talking one day. Jeff was going on a potentially dangerous trip. They agreed that they should put a buy-sell agreement together.

Bill drafted an agreement that was short and to the point. In keeping with their long-standing working relationship, Jeff agreed that what Bill drafted was reasonable. They then took two important steps.

• First, they agreed on a value for the business, which they memorialized into the buy-sell agreement. Regular readers of this blog know that this is not my preferred valuation mechanism, but it worked this time.
• They then obtained life insurance policies on both their lives for half of that amount. Fortunately, there were no health or rating problems.

The Unexpected Happened

Jeff’s trip happened and he returned and went back to work – for a few short months. Jeff died unexpectedly. There was obviously a period of mourning and the funeral. A few days later, Bill got a call from Jeff’s wife, Nancy, who said, “Well, I guess I’d better start to learn something about the business.”

Bill was more than a bit surprised to learn that Jeff had not told his wife about the buy-sell agreement. He said to her, “Well, you don’t have to learn about the business. Jeff and I reached an agreement before he died to provide for you or my wife in the case something happened to either of us.” Nancy was indeed surprised, first at learning of the agreement, and second, that Jeff had not told her about it.

In due course, the insurance proceeds came in and Bill bought Jeff’s stock, providing Nancy with sufficient liquidity to live independently. She always wondered why her husband never told her about the buy-sell agreement, but she was grateful that it was in place and provided for her.

Bill was grateful, too, because in spite of his long-standing friendship with Jeff and Nancy, he did not want to be in business with her. He now owns 100% of the business and runs it like he wants to. But Bill still has emerging issues of his own to address – his own management and ownership transitions. With Jeff gone, there is a vacuum of leadership at the business and Jeff as a potential buyer for Bill’s stock is no longer a possibility.

Conclusion

The Bill and Jeff (and Nancy) story turned out okay because Bill and Jeff did what owners of every successful private business need to do. They set up a buy-sell agreement and made arrangements for its funding in the event of one of their deaths. Bill has the business and Nancy has the accumulated value of Jeff’s many years of working to develop it.

Their situations could have been worse, far worse.

A couple of lessons to end with:

• The best time to create a buy-sell agreement was a long time ago. The next-best time is now.
• Be sure that you and any other owners understand the agreement and believe that it is mutually workable.
• If you put a buy-sell agreement in place, be sure that it is an integral part of your estate plan and tell your spouse.

The questions for readers are these: What is the state of your buy-sell agreement? Do you know what it says and how it is funded? Does your spouse know what will happen if your buy-sell agreement is triggered unexpectedly?  These are important questions that deserve thoughtful answers.

If you have a buy-sell agreement story to share, please do so in the comments. Others can benefit from what you have learned.

Until next time,

Chris