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The following example comes from my work with Financial Planner, Ron Connors. I took the rough draft he’d written and, at his request, reworked it for publication on the LinkedIn publishing platform.
THE IMPORTANCE OF HAVING A PROPERLY DRAFTED, AND FUNDED SHAREHOLDERS AGREEMENT.
“ MEET HARRY ” – HARRY IS THE NEW SPOUSE OF YOUR DECEASED PARTNER’S WIFE. HARRY NOW CONTROLS 50% OF THE SHARES OF YOUR COMPANY, WANTS TO TAKE PART IN ALL DECISIONS, GETS THE SAME RENUMERATION AS YOU, EXPECT PROFITS TO GROW AND HAS ABSOLUTELY NO BUSINESS EXPERIENCE.
SOLUTIONS – A PROPERLY DRAFTED AND FUNDED (INSURED) SHAREHOLDERS AGREEMENT, SO THAT IN THE CASE OF A SHAREHOLDER’S DEATH, SICKNESS, DISABILITY, RETIREMENT OR SELLING SHARES, THAT THERE ARE CLEAR PRODEDURES IN PLACE TO BE ABLE TO PURCHASE THE SHARES AND GUARANTEE THAT THE FUNDS ARE AVAILABLE TO DO SO.
THIS IS A STORY OF GEORGE AND BILL. THEY OWN 4 RESTAURANTS. GEORGE IS THE OPERATIONS GENIUS AND BILL IS THE FINANCIAL PERSON. GEORGE WANTS TO HAVE AN INSURED BUY-SELL AGREEMENT AS ADVISED BY STEVE, THEIR ACCOUNTANT. WE PUT PROPOSALS TOGETHER AND TALKED FOR YEARS, BUT BILL DOES NOT WANT TO SPEND THE MONEY. HE SEES NO VALUE.
SUDDENLY, GEORGE HAS A HEART ATTACK AND DIES. BILL IS NOW LEFT TO RUN THE BUSINESS, BUT DOES NOT HAVE THE OPERATIONS SKILLS GEORGE HAD. NOW BILL IS PARTNERED WITH GEORGE’S WIFE, SARAH, WHO DOES NOT KNOW ANYTHING ABOUT THE BUSINESS AND MAKES SURE NO DECISION IS MADE WITHOUT HER. THE PROBLEM IS SHE WILL NOT MAKE ANY DECISION. THE BUSINESS IS HAVING A HARD TIME BUT SARAH EXPECTS THE SAME SALARY AND DIVIDENDS GEORGE WAS GETTING – PROFITS ARE WAY DOWN AND 2 OF THE RESTAURANTS CLOSED. SARAH DECIDES TO SUE BILL AND ACCUSED HIM OF TAKING MONEY FROM THE BUSINESS.
FINALLY, AFTER 2 + YEARS OF CONFLICT, THEY HAVE A TRUCE, AS SARAH REALIZES THAT SHE IS NOT HELPING THE SITUATION, AND BILL IS DOING HIS BEST TO RUN THE 2 RESTAURANTS THAT ARE LEFT. THE VALUE IS LESS THAN 1/3 OF WHAT IT WAS WHEN GEORGE WAS ALIVE.
Why You Need a Properly Drafted and Funded Shareholders Agreement
As a co-owner of any business, it’s important to be protected in case your business partner is unable to continue his responsibilities. The best way to protect your interests is to draft a shareholders’ agreement.
The shareholders’ agreement should explicitly detail what will happen to the company should you or your partner fall ill, become disabled, decide to retire, decide to sell their shares or pass away.
I have been a financial planner for over 40 years. In my experience, what often happens when one partner in a company passes away, is that their spouse inherits their shares and becomes the second partner. If the partner’s spouse is inexperienced, this can turn out to be disastrous for the business.
The following examples are based on actual clients. These stories illustrate the consequences of not having a shareholders’ agreement in place:
You are a co-owner of Company X. Your partner has passed away and his wife has recently remarried—“Harry” who is now in control of 50% of the shares of your company. Harry now gets the same remuneration as you and although he has no business experience he is insisting on taking part in all the decisions and expects the company’s profits to grow.
You and George own four restaurants. George is the operations genius and you handle the financials. Your accountant, Steve, advises you and George to have a buy-sell agreement.
Steve has prepared a number of proposals and you and George have had several meetings with him, but you don’t see the value and are reluctant to spend the money.
Unfortunately, George has a heart attack and passes away. You are now left to run the business, but you don’t have the operations skills that George had.
George’s wife, Sarah, takes over as your business partner, but Sarah doesn’t know anything about the business. Sarah wants to be a part of all decisions but at the same time, she is reluctant to make any decisions at all. Your business is suffering and yet Sarah still expects the same salary and dividends that George was receiving.
Profits fall way down and two of the restaurants are forced to close.
Sarah decides to sue you, accusing you of taking money from the business.
Finally, after 2 years of fighting, you and Sarah reach an agreement but the value of the business has already fallen to one-third of what it was when George was alive.
As the above examples illustrate, it’s critical that you be in control of what happens to your company should a partner become unable to continue their responsibilities.
In tandem with your legal and tax advisors, I can help you set up a properly drafted and funded shareholders’ agreement. Don’t delay, contact me today.
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