4 Ds THAT COULD DESTROY A BUSINESS
DEATH, DIVORCE, DISABILITY AND DEPARTURE - These events, by no means unusual or
uncommon, can instantly throw a small company into disarray.
The 4Ds are unpleasant to consider but Case Study planning, such as a pre-nuptial and a buy-
when one of them befalls a business that • An owner’s family pays for his sell agreement, all assets may be legally
doesn’t have a plan for dealing with the neglect. required to be divided 50-50. To come up
fallout, the result can be catastrophic with the cash to pay the divorce
disorganisation, loss of business The owner of a stake in a closely held settlement owners have had to sell their
opportunities, loss of customer or market paper-making machinery manufacturer business. That may not be the final, or
share and a decrease in employee morale died suddenly six months after the worst part, of the story. In a court
and productivity may be the least of the business was launched. enforced sale, the owner may have to
repercussions. Family or partner discord, accept a discount price.
heirs left unprovided for and the demise There was no documented plan outlining
of the business are very real possibilities. ownership rights among the partners. Case Study
The deceased’s family was cut out by the • Fire Sale as a result of divorce.
DEATH other partners. These owners later sold
Particularly in family businesses, the the business for a handsome profit, As a result of divorce the owner was
death of an owner can trigger a business pocketing the funds themselves. After 11 forced to put his business up for sale.
disaster. Death can leave the heirs years of litigation the deceased’s family With offers from two potential buyers to
financially unprotected. Hoping the came away empty handed. choose between, he was forced to
surviving partners will “do the right thing” accept the lower bid because it was for
may prove optimistic, especially where At death, a tax liability may arise to the cash on the spot. The judge agreed with
big money and personal interests are at market value of the owner’s share. If a his ex-wife and her solicitor who argued
stake. Where a partner has died without method of minimising tax liability has not that it was not fair for her to have to
leaving any written plan outlining been factored into a transition plan (for accept whatever financial risk might be
their ownership rights and what is to instance by willing shares to a spouse or attached to the higher bid, which had
happen to their stake, it’s not unknown a tax efficient succession plan to pass provisions for an extended payout.
for the surviving partners to cut the the business to your children), then it
family out of the business without can mean hurriedly trying to raise DISABILITY
recompense. finance to cover the amount. But in The chance of becoming disabled during
many instances, banks are not prepared one’s working life is anywhere from one
Even where there is an agreement, if it to come to the party when the business in four to one in three - far greater odds
has not been properly structured to take has lost its major asset – the owner. than the probability of dying before
into consideration all the contingent The business may have to be sold to pay retirement and statistics show that a
issues then it’s as good as useless. Fatal the tax liability. disability that lasts beyond more than a
disputation can arise around issues like; few months will likely continue for several
Is the business required to buy out the Simply put, an owner/partner needs to years or longer.
heirs? If so, what price should they understand that failing to properly plan
receive for their share of the business for what happens to their equity in the Owner/partners need to think beyond
and under what terms? And, who is to business after their death, such as with simply replacing lost personal income,
be the purchaser – the business itself or a buy-sell agreement, will have because for them there is more at stake,
the individual owners? Personal matters consequences for their family and any such as long-term obligations they have
can arise; are all partners happy to co-owners of the business. contracted into (for example, a lease).
work with the respective heirs of the Forced retirement of a partner due to ill
other partners? DIVORCE health can jeopardise the likelihood of
Rarely do you see divorce listed as a continuing partners getting their fair
If an agreed procedure for dealing with cause of business bankruptcy, but with share out of the business or of preserving
these issues has not been nailed down in nearly one third of all marriages ending their interest in it. After a year to
a formal agreement, or set of agreements, in divorce, in circumstances that two, continuing to carry a disabled owner
then litigation is a likely recourse by the frequently turn ugly, divorce litigation has on the books gets to be an unacceptable
disgruntled party and that will inevitably destroyed many a privately held business. expense for many small businesses.
eat into the value of the business. In the absence of any type of divorce
4 Ds THAT COULD DESTROY A BUSINESS
A disability buy-sell agreement can take PLANNING FOR THE 4Ds
care of these issues by specifying the Unpleasant and emotionally charged as
types and amounts of insurance partners it may be to contemplate the 4Ds,
should take out to cover the contingency planning for them should be an integral
of health related forced retirement. It can part of overall business and personal
extend to specifying disability buyout financial planning for business owners.
insurance to provide a means for
co-owners or an outside entity to buy The last thing an owner needs is to be
the interest of the disabled owner, forced to sell their business in a hurry
generally over a period of years, once it because of unforeseen circumstances
is evident they are not going to return. or to leave their business or family in dire
position when they die. Though
DEPARTURE circumstances may occur unexpectedly,
Partners can decide to leave for a number that does not mean they cannot be
of reasons. They may decide to take up envisaged and planed for. A succession
another opportunity or simply to take plan, a buysell agreement, a pre-nuptial
life easier. Here the issues revolve around agreement - all can feed into an overall
determining what is owed to the leaving transition plan to protect the business
partner and where the money to buy and its dependents in the eventuality of
them out is coming from. one of the 4Ds.
Without proper planning, it can be a real
challenge for the retiring owner to extract,
as cash, the value they have locked up in
the business; and for the remaining
owners to compensate for his/her
removal without recourse to methods
that could damage the business viability.
An announced departure should not
trigger panic - it should trigger the
provisos laid down to handle the
situation in an established buy-sell
Provisos that have ensured there
is an agreed procedure for dealing with
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