Business owners deal with challenges, but one of the most important areas they need to address is what happens when an owner faces one of the four Ds death, disability, departure or discord.
The most common solution is a buy-sell agreement among the partners, something implemented by M.F. Cachat Co.
“In our new agreement, (an adviser) helped us develop a fair and regular way to value the shares of the company that we update on an annual basis,” says Bruce Jarosz, chief financial officer, vice president of operations and one of three owners of M.F. Cachat Co. “We have an agreement that spells out what happens if one of the shareholders wants to leave the corporation, how those shares are made available to the remaining shareholders and how that would be paid to the departing shareholder. We’ve got that all mapped out so, when the time comes, there’s no question about it.”
Jarosz, along with John Mastrantoni, president, and Ed Sherwood, vice president of sales, Central region manager, purchased the company from the first generation of owners about four years ago. With advice from Jim Aussem, co-chair of Weston Hurd’s Estate, Trust and Probate Practice Group, the trio first created the agreement to purchase the company, then installed a buy-sell agreement that spelled out the terms should one of the four Ds happen to an owner.
“It’s different if a person chooses to leave the company while we’re still paying out the old owners,” Jarosz says. “We made a commitment to ourselves that we need all three of us here working to get the old ownership paid out. If somebody leaves during the payout period, there is a substantial penalty. The value of the shares are valued a lesser value, plus there can’t be any payments made to the departing shareholder until the original shareholders are paid out.”
The buy-sell agreement, which explains how the entity will be valued, is reviewed once a year.
“There won’t be any question as to the value of the stock should somebody want to depart,” Jarosz says. “We know how the shares of that person would be split up among the remaining shareholders. The time period has already been agreed to as to what the departing shareholder would agree to in terms of a time frame for being paid.”
There are two main types of agreements redemption, in which the company buys the owner’s share, and cross-purchase, in which the other owners are the buyers. Each has advantages and tax implications depending on the type of incorporation.
“The most popular type of agreement is what’s called a wait-and-see agreement, whereby either the other shareholders or the corporation have the first right to buy when one of the four Ds takes place,” Aussem says. “If they, the shareholders, or it, the entity, chooses not to buy for whatever reason based on the advice of their legal and accounting consult, then the other entity is required to buy.”
The biggest challenge, Aussem says, is for the partners to agree on what will happen when one of the four Ds takes place. Advice from an expert is usually paid for at an hourly rate, and once that is done, the agreement can be put into place within 30 days for as little as $2,500.
For Jorsz and his partners, it is more than a contract; it’s peace of mind.
“The three of us spent significant time exploring all the things that could potentially happen to us,” he says. “If somebody passed away, we know how our estate is going to be handled. It’s much more comfortable knowing we’ve put plans in place to take care of those contingencies.”