When co-owners are united in striving toward common business goals such as growing revenue, building business value and increasing cash flow, the business dynamics can be wonderfully positive and strong. Contrast that bright picture with what can happen when the goals of the owners diverge.
As you read further, ask yourself if the real issue facing owners in our examples is the misalignment of goals or a lack of planning for the day one owner wants to leave.
Owner Disability and Other Lifetime Transfer Events
What happens when one owner of a closely held company wants or needs to leave the company, or sole owners want or need to leave theirs?
The reasons owners cite for leaving include everything from simple boredom to more dramatic and unexpected events such as the disability of an owner. As an example, let’s use an owner’s disability to illustrate some of the significant issues that arise when one owner needs to leave a company.
When a disability strikes, companies undergo both economic and operational hardships. More importantly, in the absence of a buy-sell agreement, the disabled owner’s income stream from the company usually evaporates. This is the problem Steve Hughes, one of three equal shareholders in a growing advertising agency, confronted.
At age 38, Steve Hughes had a stroke. As is the case with many stroke victims, his recovery was incomplete. Physically, he was the picture of health; his golf game even improved. However, he lost his ability to speak and read. Doctors told Hughes he would never return to work.
Hughes' firm had a buy-sell agreement, but it covered only a buyout at death and an option for the company to buy his stock if he were to try to sell it to a third party. It was silent on an owner disability or the more common situation of owners choosing to leave the company. This glaring omission left the company and Steve in a classic dilemma.
The company, or rather the remaining shareholders, wanted to purchase Hughes' stock so that its future appreciation in value, now due to their efforts alone, would be fully attributed to them.
Consequences for the Hughes Family
After the difficulty of the stroke and recovery period, the Hughes family was still in a difficult position.
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