Preparing for the Worst ... Catastrophic Loss

LCT Staff
Posted on June 1, 2003

It was 5 in the morning when the penetrating ring of the phone jerked Michael Rice out of a deep sleep. An old friend and ex-employee, a guy who eventually became the local fire chief, was on the other end. ‘Steve didn’t make it,’ he said.

“Huh?” mumbled Rice, groggy, wondering why someone would call him at the crack of dawn to tell him his business partner had missed a breakfast meeting. “Steve died last night.”

If you’re lucky, you’ll never have one of those surreal moments when the words you just heard are simply too horrible to comprehend – they just don’t make sense to you. For Rice, it was hearing that his longtime friend, Steve Paul – a seemingly healthy 52-year-old ex-Marine, whose very presence, sense of humor and dignity made him seem totally indestructible – could have died, just like that.

But it was true. In the middle of a bone-chilling December night last year, the founder, president and CEO of Tran-Star Executive Transportation Services of Deer Park, N.Y., fell victim to heart failure. Rice, executive vice president and co-owner, was suddenly thrust into a role that would lead to many sleepless nights.

With a mourning family leaning on him for strength and dozens of employees counting on him to keep that 80-vehicle machine rolling, he had little time to deal with the pain and emptiness he felt upon having suffered such a great and unexpected loss. There were so many details to worry over, so much to lose.

It’s a situation that occurs every day. And the terrible truth is that money and the stress of losing a loved one can turn family members and business partners into clamoring, vicious adversaries.

How will the heirs of the departed be compensated? Who’s in charge of the partner’s share in the company?

So many questions must be answered before an unforeseen event happens. Otherwise, you risk a savage legal tangle that can leave everyone involved emotionally and financially drained.

Even if the surviving families and business partners agree to work together amicably, it’s not likely that the partners will be able buy out their shares of ownership at fair market value using their savings or the company’s working capital. Survivors of a business partner should not be denied a large percentage of an inheritance just because it’s in the form of an operating company.

After merging Admiral Limousine and Presidential Limousine – the two largest operations in Colorado at the time – owners Michele Rossi and Gene Cookenboo wasted no time developing a comprehensive buy-sell agreement. This type of agreement is meant to insulate owners and their families from financial devastation in the event of a loss. In its most basic form, it is a series of insurance policies, written for the total value of the company and divided among the owners.

“Every January you set the price of your company,” Rossi says. “That way, if a tragedy occurs, the surviving partner can automatically buy the stock, and the estate of the family gets paid ‘X’ amount based on the company’s value. There can be no fighting over stock purchases because the agreement sets the value. Plus, the family knows they are automatically taken care of.”

To make the equation simple, imagine two partners, each owning 50% of a company that they have valued at $1 million.

Each owner would have policies on themselves for $500,000, with the other partner the beneficiary. If one partner dies, the other would use the death benefits to pay the heirs their share of the company, valued at $500,000. This would leave the surviving partner in control of the entire company, still worth $1 million.

If there are three partners, each would hold policies on the other two for part of their ownership value. Six policies would be necessary, and a death would result in the two remaining partners sharing ownership equally, with the estate of the deceased receiving one-third of the company’s total value.

It’s important to consult a good, reliable attorney to ensure there are no problems from a legal standpoint. Several variations of these agreements exist, each with its own potential tax burdens and other ramifications so your company’s tax or financial advisor should also be part of the process.

Fortunately, for Michael Rice and the Paul family, the two owners had the foresight to make the proper legal arrangements in the event of just such a catastrophe. A long-running friendship and mutual respect, along with a buy-sell agreement, helped everyone get through a tragedy that could have been even more devastating. After some time had passed, the Paul family was able to summon the strength to pitch in and help keep the business moving forward.

“We were very lucky,” Rice notes. “Linda (Steve’s widow) and I get along well, and she has a lot of experience at the company, which turned out to be a great help to me. She wanted to remain a part of the business and I welcomed the assistance. She started the business with Steve, taking all the reservations and doing all the bookkeeping and dispatching out of the house the first couple of years, so she’s a great help. She continues to handle our accounting.”

Rice has faced many changes and challenges since the death of his long-time partner. Paul had been in charge of all sales and financial matters, and Rice was forced to dig deep within himself to find the strength to fill those roles.

To help shoulder some of the burden, key employees were promoted. Steve and Linda’s son, Justin, is now building sales, while another son, John, offers discounted maintenance services through a local auto body repair shop he owns.

Linda has reinvested in the company she founded with her husband more than a decade ago, and a new buy-sell agreement is now in place between her and Rice. The end result: No employees were laid off or vehicles sold, and the company remains strong.

“Steve founded Tran-Star, so a lot of people really knew it as his company; he’s surely missed around here,” Rice says. “There’s not a day that goes by that something doesn’t come up that makes us all think of him one way or the other. But things are going well. We are a lot stronger than I thought we would be at this point in the game.”

Related Topics: business partnerships, deaths, family businesses, partnership contracts, succession

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