It’s common for siblings or family members to take over a family business. But what happens when the day-to-day management threatens to strain family relationships? Jeff Halpern, Business Succession Advisor with TD Wealth, joins Kim Parlee to discuss some tools you can use to manage disputes, including shareholder agreements, buy-out arrangements and more.
- Thanks for having me today, Kim. What you're describing is something that happens in real life. Very often, partners will have disagreements, and they need a rule book to help them to deal with these eventualities, like disputes, death, divorce, retirement, disability. The shareholder's agreement-- there's a written agreement that provides them with the way to deal with all of these things amicably in order for them to avoid expensive litigation.
The other thing that they have to be thinking about is what happens if one of those siblings should pass away prematurely. Does the survivor want to be in business with the widow of the deceased sibling? I doubt it. And so because of that, it's very common to put life insurance in place in order to fund the buy/sell arising in the event of an untimely death.
- What do you-- are there any other options, too? If we start getting down the route of irreconcilable differences, is a buyout possible, when one partner could buy out another?
- Absolutely, Kim. I review a lot of shareholders agreements. And recently, I reviewed one that had something called a frustration clause. And it's very, very interesting, Kim. The frustration clause basically provides a clause that, in the event that both partners cannot agree and, really, it is frustrating the conduct of the business, they can invoke the frustration clause, which causes the business to be put up for sale. And they each then have the ability to buy back the business at the fair market value at whatever offer is being received by a third party. But at the end of the day, if they really can't get along and the business is suffering, they can force the business to be sold so they each get paid out.
- And I guess that is it. If the relationship is so damaged that it can't recover, it really is about considering a sale.
- Absolutely, Kim. Recently, we've read about some very, very wealthy families that have ended up in the newspaper because they've had to resort to litigation and a court of law to decide the outcome of their fate. We'd like our clients to take good advice before that ever happens to keep their names out of the paper.
- Jeff, thanks very much.
- Thank you, Kim.
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