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Managing Frank And His Family's Personal Wealth – So He Can Exit His Business On His Terms

Frank was visibly upset when he came in to see me in the Fall of 2011. He had been planning to retire in three years by age 60, based on the combined value of his personal investments and his company. This was now on hold for an indefinite period of time. Like many, he had suffered a significant hit in the 2008 – 2009 stock market declines and the recession’s impact on his business. But this wasn’t what was bothering him. He had resolved the financial spending issues he had had with his wife and put his business back on solid footing with the help of a Business Model Strategic Plan.
He had a new problem to deal with now.

Research shows there are 12 principal reasons business owner transitions, successions and exits fail. Each of these reasons impacts the company’s longevity and ongoing annual profitability as well as an owner’s transition and future exit results. This article addresses the sixth of the 12 reasons:

Reason #6.  Mismanagement of Personal Wealth.  You (or your family members) have failed to properly manage your personal (non-company) wealth, resulting in an indefinite and extended need to draw on company resources and a disruption to your transition timing and to your successor’s expectations.

A business owner’s personal wealth planning is critical to successful Transition and Exit Planning. The failure to address your personal wealth planning can delay or diminish the odds of meeting your key business transition and exit objectives.

Frank was starting to understand that business owner Transition and Exit Planning is not just about the business. During his tenure as the founder and owner of Zuppo Building Components in Sioux Falls, South Dakota, he had enjoyed a healthy bottom line. While it took years to achieve this level of success, he was happy to be able to share the fruits of his labors with his children. For his Estate Planning and Asset Protection reasons, he had gifted 48% of his stock to his and his wife Fione’s four adult married children and their spouses. As a Subchapter “S” corporation, he was also able to easily distribute dividends to himself, to Fione and to their children’s families.

Times had been great for about 15 years. However, as the saying goes, “No good deed goes unpunished.” Fione had become an uncontrollable spender until Frank and she sat down in 2006 with Jake, a financial advisor. Jake projected the downfall they were heading towards, and the retirement funding shortfall they would be facing, especially with any kind of sustained economic downturn.

While this brought them back in line, their mistake was in rejecting Jake’s suggestion to extend this same planning to their children. The recent call from their son, Lou, is what prompted Jake’s referral of Frank to me.

Frank had no idea that Lou and his wife had pledged their Zuppo stock as collateral for both an unnecessary home remodeling project and to help secure financing for Lou’s Fort Lauderdale real estate development business. The Florida real estate market had zapped both the equity in his home and the viability of his business.

The bank was calling and was ready to either demand a high price for the stock or plan to remain a shareholder in Zuppo for a long time (also possibly threatening its Subchapter “S” status). While the bank was demanding twice what Frank thought the stock was worth, at some price Lou’s bank might have been manageable (if Frank’s bank would help out), but the other half of Lou’s call dealt with the divorce petition his fed-up wife had just filed. She wanted to keep whatever portion of her stock might be left after the bank cashed out.

Frank had had enough. Lou’s problems had become his problem. He needed to deal with this, and he also wanted to discuss accepting a mildly attractive offer to sell the company he had just received.

So, what should Frank have done and what could he do now?

Frank’s local corporate and estate planning attorneys had handled the stock gifts but never suggested that he have his children and their spouses sign a Buy-Sell Agreement. They were family, after all.

The first thing Frank should have done was to require each child and in-law to sign a Buy-Sell Agreement as a condition to receiving the stock gifts. This agreement, among other things, would specifically:

  • Prohibit pledging stock as a collateral.
  • Give the company and the other shareholders the option to purchase – at pre-agreed pricing – the stock of any shareholder who became insolvent.
  • Give the founder’s child the right to purchase – at pre-agreed pricing – any stock remaining in the in-law’s hands after a divorce (with a back-up option to the company and the other shareholders).
  • Give Frank a “drag along” right to require all minority shareholders to agree to a sale of the company at Frank’s direction.

The second thing Frank should have done as a condition to the stock gifts was to require each child and in-law to agree to use his financial advisor to develop a financial plan for each of them.
Jake had gotten Frank and Fione out of trouble. He could have done the same for Lou and his wife. Frank could even offer, as a Christmas gift or anniversary gift, to pay the planning fees for each child.

Instilling the sense of financial responsibility in each child is a parent’s duty. Engaging the right professional help is a strong step in the right direction.

So . . . what could Frank do now? If negotiations and/or a mediation with Lou’s bank and Frank’s daughter-in-law proved to be a dead end, he could implement a statutory reverse merger. This would force the redemption of their stock at an appraised price that reflected true fair value, during which time a Buy-Sell Agreement would be put in place with the other shareholders to prevent the same problems from occurring in the future.

Following that, with the pressure relieved, if Frank still wanted to sell the company, we would work with him to set up the right process to maximize his value from selling the company.

And, whether or not the company is sold, Jake should be engaged for the benefit of Frank and Fione’s children. Frank had operated too long under a “Wait and See” approach to his Transition and Exit Planning. It was time to put a better plan in place.

Next Newsletter – How Gary’s “Flea-Flicker” Exit Plan, which relied on his perishable business model, would doom his future exit.