Expect the unexpected

Nick and Tom have been running a business together for the past 15 years. The business has over 20 employees and annual turnover amounts to $10 million. They had been friends for years before they got into business and have always agreed on everything with a simple handshake, which has worked for them through the journey. They believe that the business can draw on its capital should the requirement to ‘buy out’ one another arise in the future.

However, Nick unexpectedly passes away. His wife, Jen, inherits Nick’s share of the business.

Jen wants to sell the shares she has inherited from Nick, and Tom offers to pay Jen $2 million for her half of the business. Jen hasn’t been involved in the business as she has been raising their young children and is unsure how much her share is worth, she organises an independent valuation which reveals the shares are actually worth $3 million.

Tom tells Jen that he cannot source the required funds to buy the shares from her at the higher price as this would cripple the business. Jen insists on an immediate payout, she has lost trust in Tom and just wants a clean break.

12 months on, Jen and Tom remain gridlocked and their personal relationship has deteriorated to the point where Jen won’t even visit Tom’s wife Sally who has been her friend since childhood. Jen wants to be bought out for a fair value after all the years of hard work Nick put into the business. Tom meanwhile is resentful of Jen as he has been running the business on his own but having to pay out half the profits to Jen given she owns half the company.

All this could have been avoided had Nick and Tom entered into a buy/sell agreement with supporting insurance policies to fund the exchange in shares in the business. The agreement could have provided for a seamless transfer of Nick’s ownership to Tom whilst ensuring Jen received adequate consideration for relinquishing the business equity she inherited from Nick.

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