Nick, Tom, David and Karen are co-directors of a Legal firm. It has 20 staff and an annual turnover of $10 million.
The directors are unconvinced of the benefits of personal insurance to protect their equity in the business. They have a handshake agreement in place and believe that the business can draw on its capital should the requirement to ‘buy out’ one another arise in the future.
Nick unexpectedly passes away. Nick’s family trust owns his shares in the business, which is now represented by his wife Jen.
Jen wants to sell the shares and the remaining directors offer to pay $2 million for Nick’s shares. Jen requests an independent valuation and it reveals that the shares are worth $3 million.
The remaining directors cannot fund the purchase. Twelve months on, Jen and the remaining directors are still gridlocked.
Have a Buy/Sell Arrangement in place. Directors need supporting insurance policies to fund the exchange in shares in a business, and its true value is often underestimated.
An agreement could have provided for a seamless transfer of Nick’s ownership interest to the remaining directors whilst ensuring Jen received adequate consideration for relinquishing the business equity she inherited from Nick.