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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


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
the situation.

                                                                                              For more information
                                                                                              contact: +353 (0)61 400 515
                                                                                              OHB Consulting Limited
                                                                                              26 Barrington Street,
                                                                                              Limerick City, Ireland

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