Poor Succession Plan? One Vendor Pays The Price.

One Hackensack, N.J.-based vending operator, Eliot Faber, believes he has learned the importance of having a buy-sell agreement for his business as he spends his days fighting over the ownership of his company with his former partner’s widow.

Faber’s company, M&C Vending Co. Inc., is in many ways a typical family owned and operated vending business. The company was started by Faber’s father, the late Martin Faber, in 1959. Two of the late Martin Faber’s sons, Eliot and a brother, worked in the business during their childhoods and eventually assumed full-time positions. The late Martin Faber issued ownership shares to his sons. Eliot was assigned 60 percent ownership and his brother received 40 percent.

In 1995, the brothers passed a corporate resolution accepting their father’s retirement, Faber said. They also agreed they would each be compensated with a salary, health benefits and a vehicle, and that in the event of one of their deaths, the deceased brother’s interest would be bought by the company based on fair market value.

Problems arose between the brothers soon after their father passed away in 1996; the brothers frequently fought over numerous issues.

PROBLEMS INCREASE WHEN ONE BROTHER PASSES AWAY

The problems exacerbated in 2003 when Eliot’s brother died in an automobile accident. Ever since then, he has been battling his sister-in-law in and out of court over the value of her share of the company’s assets.

“I never in my wildest dreams would have thought any of this would go on in my life,” Faber said in a recent interview. “All I do is bang my head against the wall.” The situation has dragged on for more than six years and it has exhausted him both emotionally and financially.

One of the most aggravating aspects of the case for Faber is his belief that problems could have been avoided had the brothers signed a “buy-sell” agreement when they assumed company ownership. This was something he said they considered doing but decided against to save money. As a result, Faber estimates he has spent $50,000 in legal fees since his brother died.

1995 RESOLUTION FAILED TO ADDRESS FAIR MARKET VALUE

Faber said the resolution signed in 1995 stated that in the event of one of their deaths, the deceased’s interest would be bought by the company based on fair market value. But the resolution failed to provide a methodology for how that fair market value would be determined.

Had the brothers signed an agreement that specified how this was to be determined, Faber’s sister-in-law could have received an agreed-upon settlement when her husband died.

While the buy-sell agreement would not necessarily have prevented any and all possible legal disputes, Faber believes the heir would have been more inclined to accept a previously-agreed upon method for determining the value of her interest.

WHAT A BUY-SELL AGREEMENT MIGHT HAVE DONE

The buy-sell agreement would have worked as follows: M&C Vending Co. signs a legal document stating what will happen with the company in the event of a partner’s death or discontinuation with the company. Such an agreement states how the company’s value will be determined.

To make sure that the surviving partner has the funds to buy the deceased partner’s estate, the partners buy life insurance. Either the company purchases a life insurance policy naming itself as the beneficiary in the event of either brother’s death, or the partners purchase life insurance on each other. The insurance settlement(s) then funds the purchase of the deceased partner’s share.

“The best way is for a company to buy life insurance policies on the principals,” said Joe Meyers, a Hackensack, N.J. attorney who represents Eliot Faber. “You really need to have access to cash to buy out the interest of the partner who is deceased or is leaving the company. They should have in place a valuation methodology as well as a financing plan for the buyout. Short of those two things, you’ve got a problem.”