Here’s a war story. Two partners started an agency years ago. At the time, their lawyers and accountants told them to set a value on the business, so that if either of them died, or if one of them wanted to get out, there would be an established price per share. They did what they were told. In the ensuing years, these guys worked very hard, and built a multi-million dollar advertising agency. Last year, one of them died suddenly. After proper mourning time had elapsed, the deceased partner’s wife received a check in the mail in payment for the deceased’s shares, based on their stockholder’s agreement. To her surprise, the check was for quite a bit less than she expected. The reason: the two partners had never reset the value of the shares. The widow was paid significantly less than the business was worth at the time of her husband’s death.
She sued, and eventually received a fair market value for her husband’s share, but it cost her thousands of dollars in legal and accounting fees, and she still did not get all that she should have.
Put a Procedure in Place
Here’s a little corporate/partnership advice: Have a stockholder agreement between shareholders of your corporation. A part of that agreement should cover a shareholder leaving the corporation—alive or dead.
If an agency owner needs to get out alive, there has to be a procedure in place that will offer his or her shares to the corporation first, then to the other stockholders, and finally to the public. If an owner dies, in most cases the partners or successors will not want to deal with the widowed spouse. There needs to be an agreement that the spouse will be bought out immediately for a predetermined price. This buy-out is generally funded by a life insurance policy on the owner, which is held by the corporation.
The key issue here is amount. Unless the shareholders come to an agreement as to the value of the corporation EACH AND EVERY YEAR, they are asking for trouble. If agency owners have neglected to value the shares at all, I can assure you one of the above situations will put you in the middle of the biggest fight you’ve ever been in. And if you do not place a current value on the shares, someone is not going to get the kind of money your company is worth. Yes, you can sue for fair market value, but who wants to get involved with lawyers?
The Agency Valuation
The best way to do this share valuation is to sit with your partners at the annual shareholders’ meeting and get the job done. Yes, you should have a formal annual stockholders’ meeting. It may sound silly if there are only two of you, but it is necessary. It’s kind of nice, too. Have it in some fine restaurant, or the country club. After dinner with the spouses, the shareholders should retire to another room to conduct the business at hand. Have your attorney and accountant there also. They can help you reach and validate decisions you are trying to make.
You see what this does, don’t you? The moment you set a value on the corporation, it eliminates all questions. If you want to get out, there isn’t any argument on what the price should be, and if you die, your heirs are immediately paid a fair price for your share of the business.
It’s also self-policing to do this. If you, as a group, decide to value the business high, the insurance premium you need to pay to fund it will be prohibitive.
Do yourself a favor. Get your corporate act in order. What’s the sense of working hard all your life and having it come to nothing?
Need an agency valuation? Contact us to learn how Second Wind can help.
See also: What’s Your Agency Worth?