The local economy remains very strong and businesses continue to grow. I find these are good times for business owners to determine whether they’re protected against risks that could cause major distress to their company. One of them is not having an ownership agreement (also known as a shareholder, buy-sell, or operating agreement) that adequately spells out how and what decisions are made if something goes wrong.
Have you ever thought about what would happen if you or your business partner unexpectedly passed away? If you’re the business owner or married to one, what will the surviving spouse have to live on? That owner’s salary will stop and without an agreement in place, there will be no obligation to buyout the business interest of that deceased owner. This can be devastating to a spouse who relies on that income. On the other hand, if there is an agreement and a buy-out is required, can the company afford to purchase that business interest from the surviving spouse? Does the business have life insurance on the business owners to relieve this financial pressure?
Another key issue in this type of agreement is calculating the value of the business interest to be bought out. Who values it (i.e. the company’s CPA, a certified appraiser, etc.) and will only one valuation determine the price? Also, if the deceased owner owns a minority interest (meaning less than 50% of the business), will he or she get the full value for the business interest or will there be a discount? Discounts apply when that owner can’t make business decisions on his or her own and the business interest cannot be sold on the public market. These discounts could be 40% or more and could reduce the buy-out price to that surviving spouse by $400,000 on a $1 million undiscounted value. To compound the problem, Michigan law isn’t clear whether a discount must be applied if there isn’t an ownership agreement or the agreement doesn’t address the issue. Rather than leave this to open to dispute during a tragic life event, it can be proactively dealt with in an agreement.
All of these issues and others can be covered in an ownership agreement. In other words, you do not need to put your business at risk with life events like this. If I can be of any help with structuring this type of agreement, let me know.