Business Transition Lessons Learned: Make Sure To Keep Buy-Sell Agreements Current

    By | Small Business

    Elderly lady touching her head

    JoAnne was so excited. Soon, she was going to be spending much less at her fashion design business and would be able to go back to what she had always dreamed of doing, being a painter. She had a wonderful team in place but a lot of the success had been due to her partner, Beth, who possessed a flair for design, which had put their company on the map and she an industry icon. Beth was several years younger and very eager to expand the business they agreed she would start buying JoAnne out. Business was doing great.  JoAnne had been pretty diligent about investing outside of the business but knew she would need the money produced by the sale of her shares to her partner to create the lifestyle she wanted especially since she was not yet officially retirement age.

    JoAnne was in Paris a year later when she got the news. Her partner had suffered a heart attack and was not expected to live. She caught the next flight back, but was too late. Devastated and in shock, JoAnne tried to cope with the loss of her business partner and friend while figuring out what this meant for her plans. After the funeral and the dust settled, JoAnne tried to get the business affairs in order. She had been away so long she didn’t know where to start. How would the business do without her partner? JoAnne didn’t want to come back into the business especially without her. She really had been the face of the business.

    That is when JoAnne remembered they had purchased a life insurance policy on Beth when they had started the business about 25 years ago. This might be the answer she was hoping for. JoAnne placed a call to their attorney and he said yes, she was correct, they did have a policy on both of them as part of a buy-sell agreement when they first opened. Thank goodness they had done that. JoAnne went to her attorney to pick up the policy so she could send it in and receive the death benefit. When she opened the policy envelope her heart sank, $100,000! How could that be? Beth had agreed to pay her $750,000 for her shares. She couldn’t even replace Beth with someone for $100,000 a year, no less pay her for her half of the company.

    The Outcomes:

    • JoAnne needed the money from the sale of her shares to live the rest of her life.
    • She could not run the business without Beth. Beth was the business.
    • Their key man life insurance had not been increased to match the increasing value of the business.
    • JoAnne had to come out of retirement to try and save the business.
    • JoAnne ended up losing the business and going to work for a competitor.

    The Desired Outcomes:

    • JoAnne could have increased her savings outside of the business to reduce her dependency on the sale of her shares of the business.
    • By creating a successor for Beth they could have minimized the business dependence on Beth. The business could have continued without her.
    • By making sure their key man life insurance and buy-sell agreements were current they could have insured there would be sufficient cash available to continue the business or buy out the partner.
    • JoAnne could have remained in retirement and painting in Paris.

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    This article was syndicated from Business 2 Community: Business Transition Lessons Learned: Make Sure To Keep Buy-Sell Agreements Current

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