The Biggest Little Law Firm® Asks “Our Agreement Says What?”

Among the last things a small business owner wants to hear from an attorney is that he or she needs to pay to have their corporate or estate planning documents reviewed and updated. Putting them in place years ago cost money and required an effort to get done the first time. Nevertheless, updated documents are one of the keys to smooth operation and transition of an enterprise. Consider the various changes that occur over the lifetime of a business or of an owner. Business partners retire, become disabled, get divorced or pass on. The value of a company varies due to a variety of factors. Children who began as summer clerks grow up and begin making substantive decisions. The point is that things change. Many business owners plan ahead and execute Buy-Sell or other agreements, one of the functions of which is to help transition the business from one generation or owner to another. It is common for business owners who execute Buy-Sell Agreements to state an agreed-upon buyout price or formula to fix value on the death of one of the owners. But what if the price was agreed upon in 2002 and the Buy-Sell has not been reviewed or updated for ten years? The value of the business may have skyrocketed (or fallen) during that time period. If so, the deceased owner’s heirs may only be due the value that was agreed upon ten years earlier rather than a more current value. Iif the value of the business has fallen, the remaining purchasing owner may have to come up with an amount of cash far in excess of the true value of the interest. Conversely, a selling owner may not receive fair value. Updating the document to reflect the more current circumstances could have prevent the problem.   Suppose two owners of a business are college sorority sisters who started a company after graduation. They were diligent enough to put a Buy-Sell in place but did so when they were both poor and single. Ten years later, the business has prospered and each has married but neither thought about dusting off the Buy-Sell to update it. Perhaps one has decided to be a stay at home Mom. Suppose that one of the owners subsequently divorces and half of her shares pass to her ex-spouse. It is highly doubtful that the non-divorcing owner wants to be in business with her partner’s ex-spouse. Again, updating the document could easily prevent the resulting problem. Imagine if a sole owner of a business has two kids, both of whom were cherubs during their youths when the owner and his wife purchased a small franchise and had a basic will drafted. Twenty years later, the franchise is thriving, but both children are deeply in debt with creditors circling, one for past due student loans, the other from a health issue. If the owner and his wife pass together, the business passes outright to kids who may find their creditors attempting to forcibly selling the business to fulfill their debt obligations. If that happens, a family legacy could be lost and the employees may not be retained. Creating an irrevocable trust could solve this problem. The point of these anecdotes is that it is good to touch base with your favorite Van Osdol & Magruder attorney from time to time. Discuss life and the changes it has brought. Business owners should consider joining our Client Advantage Program, which brings many of our clients to us once a year for a business and estate planning checkup. By the way, if you are a business owner without a Buy-Sell in place, or without a basic estate plan, you need to make an appointment to see an attorney immediately, before year- end tax changes take effect.