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University of Massachusetts Amherst

Family Business Center

What Might Kill Your Business

by Shel Horowitz

Dave Hobert of Soverign Bank, Ron Weiss of Bulkley, Richardson & Gelinas, Charlie Epstein of Mass Mutual, and Kris Houghton of Meyers Brothers - all corporate sponsors of the Family Business Center - shared the platform for a brief presentation at the June meeting to discuss key mistakes family businesses often make

First scenario: a widow confronts the surviving family business co-owner about the small size of her payout, based on an outdated buy-sell. Weiss, pointing out that the value of the business may grow much faster than any funding mechanism, said that actually, a buy-sell based on low, obsolete numbers can be a very favorable thing - "You may have a gold mine, because the agreement may be grandfathered at the old price and save you a huge estate tax bill" - but only if the survivors are protected in other ways. "You have to make some arrangement to get earnings out to family members. There may be next generation to whom you'd like to pass that stock. You've shut them out. Nothing prevents you from funding a buyout without a buy-sell agreement that mandates it."

Of course, there are reasons to keep the valuation current, too. Hobert noted,. "We encourage businesses to go out and get a valuation done. You can have an agreement to update that on an ongoing basis. Your business changes over time. You can go to a bank and say we didn't have life insurance to cover the buy-sell, but we have a current valuation and this is what we think we want to borrow. Many times, we do management buyouts."

In another scenario, a business owner is trapped when a big conglomerate moves in with a lowball purchase offer, and the business owner sees the market for his product collapsing around him. Unfortunately, the owner saw the price of the business as his ticket to retirement. Said Epstein," You could make 20, 30, 40% in your business, and it's going to be very hard for anyone to convince you to invest elsewhere. But if over the years, you took some of the money and put it in outside investments, by the time you sell your business it's a windfall; you don't even need the money."

Houghton suggested "nonqualified plans that pay on disability, retirement, or death. If you plan up front, the buy-sell might take that into consideration."

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