Buy Sell Agreement
THE FIVE “D”s
DIVORCE DISABILITY DEATH DISCHARGE DISASTER
A SENSITIVE ISSUE
One of the more sensitive issues often not faced by start-up company founders or small company management is how to prepare for the eventual occurrence of one of several events which I call The Five “D”s. The hesitancy is similar to that people express by not wanting to draft a will or consider an estate plan. It’s not fun to contemplate one’s mortality in a serious way such as in writing down what one wants done with his or her estate.
Founders or principals never want to consider “their” company without them. But it happens daily all around the country. Cars crash; marriages go sour; founders fight. But what about the effect such events have on the company?
Irrespective of which D occurs, what happens may be illustrated by the following examples:
a. a founder’s ex-wife re-marries; her new husband, a consultant, would like steady income and, votes in hand, seeks a board seat and to become vice president of (fill in the blank);
b. the ex-spouse wants a job and a board seat;
c. the discharged founder, angry at being let loose, threatens to sell his shares to a competitor;
d. the key venture capital investors want to sell the company because the death of two principals in an auto crash has destabilized the company;
e. a key founder suffers a stroke; her husband wants to sell and move to Hawaii.
Sound far-fetched? Think again. Each of the above is reasonably likely if one of the Five Ds strikes your company.
Is there a solution? Yes, of course, but the fact is that many lawyers fail even to inform their clients of these possibilities or, worse, fail to insist on the solution because their clients don’t want to face the difficulties involved in determining the outcome of a “what if”. Worse, lawyers without business experience fail to recognize the prospective dangers and never raise the issue with the client.
The solution seems simple enough. A buy-sell agreement between and among the founders and their families to arrange for the remaining shareholders to purchase the stock at fair market value or, alternatively, for the company to purchase the stock and retire it or re-sell it to others. The money for this? Insurance, paid for by the company, a variation on the key man or woman insurance plan.
But the simplicity is quite deceptive. The arguments involved are among the most bitter management will ever encounter. Nevertheless, I insist my clients provide for the Five Ds. I would be derelict if I did not. And our clients would be by far the worse off were we to wimp out on them and take the easy road.
Do not fail to heed this advice. Someday you’ll be so glad you did.