Case Study: The Tom & Jerry Anvil Company
The backstory: Welcome to the familiar story of Tom Fheelein & Jerry Rhodeint, 2 friends that both owned 50% of a budding business. During the early years they were so busy scaling their business upwards that they “did not have time to plan” for anything else. Orders were flying through the door so fast they could not even keep up. (I don’t suppose that sounds familiar?) Fast forward a couple of years and they have moved out of a garage and into a warehouse, have both married the loves of their lives, and after years of hard work their company has grown to be worth ONE MILLION DOLLARS. Now, what does this mean for the Fheelein family and the Rhodeint family?
Tom and Jerry Anvil Co. (Worth $1 million)
$500k of Company $500k of Company
Because of the success of their business they have been flying high and have big plans for the future, that is until something unexpectedly happens to Tom…..
What went wrong: One day, Tom had to pick up the slack for one of his delivery drivers that called in sick. He knew that he had customers waiting on Anvil shipments, so he decided to load up the truck and deliver them himself. As they say, “A happy customer is the best business strategy of all.” Unfortunately, halfway through the delivery route he became extremely sleepy from missing his daily catnap. You’re probably seeing where this is going so I will save you some time. Tom ended up in a single-vehicle wreck that cost him his life after he fell asleep behind the wheel! Now what happens to The Tom and Jerry Anvil Company?
Toodles is now Jerry’s new business partner
The Outcome: Jerry, devastated by the news, now must figure out how to pick up the pieces and get the business back on track. Not only did he lose a best friend and business partner, he gained a new business partner that he never saw coming, Toodles the wife of Tom. Toodles knows absolutely nothing about the Anvil business and has no way of replacing Tom’s knowledge and expertise. What options does Jerry have?
The best option for all parties involved would be that Jerry just buy Toodles out of Tom’s $500k share and take complete ownership of the business. The problem is that Jerry does not have the cash on hand to do so. This tends to be the most common scenario so what happens whenever Jerry does not have the money to buy out the spouse of his deceased business partner? Below are just a few.
- Get a bank loan. This could be tough now that half of the brains of the operation is gone.
- Sell off assets, if there are any to sell. A lot of time this comes at a large discount.
- Sell the business completely & split the profits with Toodles. Who wants to do that!?
- Look for another potential partner that is willing to buy into the business and get Toodles out.
- But, is this new partner someone that Jerry will get along with?
None of these options seem really appealing so how can you make sure that your business does not end up like The Tom and Jerry Anvil Company?
First, I want to ask you a question. How is your Buy-Sell Agreement structured? If you have no clue what I am talking about don’t be ashamed. I have found repeatedly that business owners completely neglect this piece of planning.
What is a Buy-Sell Agreement: According to Investopedia this is a “legally binding agreement used to reallocate a share of a business if an owner dies or leaves the business.” As stated, these can be triggered due to the death of a partner, if the partner just wants out, or they can even be triggered if a partner becomes incapacitated and can no longer perform their duties. These agreements will help you and your partner(s) have everything ironed out if one of these scenarios happens. They are meant to protect you and your business while having a mutually agreed upon outcome among the partner(s).
Just remember, if you put a buy-sell agreement in place or already have one, they are only as good as the funding vehicle inside of them to pay out your partner’s share. Without a funding mechanism, a Buy-Sell Agreement might just turn into fancy piece of paper. I suggest you reach out to an advisor that has experience in these issues to help you make informed decisions about how to properly set them up and fund them.
DISCLAIMER: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial, or accounting advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction.