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.”

Faber believes a dispute would have been less likely had the brothers agreed in advance on a settlement amount or on a formula for determining the value.

The brothers did seek quotes for a life insurance policy when they assumed company ownership, Faber said, but they felt the quotes were too expensive. In retrospect, even the highest quote they received would have cost far less money than what has been spent in the legal fees since the one brother died.

Faber said he could not have imagined the events that eventually led to his current situation.

Relations between the two brothers deteriorated prior to the one brother’s death in 2003. The brothers accused one another of mismanagement, improper handling of funds and deceit.

In 2002, Eliot Faber advised his brother, through an attorney, that if the disruptive behavior continued, he would terminate him, in addition to seeking demands for compensatory and punitive damages. Eliot Faber told his brother that he was still open to an equitable buy-out agreement.

As bad as things had become, events took a turn for the worse in 2003 when the brother died in an automobile accident. Eliot Faber’s sister-in-law then became 40 percent owner of the company. Faber said he offered to buy her out for a certain amount, but she turned down the offer, claiming her 40 percent warranted a larger sum than Faber offered.

Faber eventually decided the only way to resolve the matter was through the justice system, and that has been a long and costly process that remains unsettled.

These weren’t Faber’s only problems. With his sister-in-law owning 40 percent of the business, he said he needed her cooperation to use company assets as collateral for loans, cooperation she would not give on account of their legal dispute. In order to borrow money for the business, Faber said he had to use his personal assets as collateral.

In 2007, Faber sued his sister-in-law demanding a judgment against his brother’s estate and for an accounting of all monies which he claimed his brother embezzled. The suit asked the court to determine the amount of money he was obliged to pay his deceased brother’s estate, taking into consideration the money he claims was embezzled.

2008: SISTER-IN-LAW FILES A COUNTERCLAIM

In 2008, Faber’s sister-in-law filed a counterclaim. The counterclaim asks the court to appoint a temporary receiver to manage the company until a complete accounting of its assets is performed. The counterclaim says Eliot Faber misappropriated funds for personal use and concealed activities from his brother. It seeks damages and asks that the company be dissolved.

A trial was scheduled in August of 2009. Faber, to support his valuation of the company, arranged to have an industry consultant testify on his behalf. He flew the consultant in and put him up in a hotel.

In a surprise move, the judge postponed the trial on the day it was scheduled, resulting in lost time for the consultant and Faber’s attorney. Faber estimates the lost hearing cost him $5,000.

WOULD A BUY-SELL AGREEMENT HAVE PREVENTED CONFLICT?

In the case of M&C Vending, a buy-sell agreement would have given a methodology for valuing the company.

“No matter what the issues are, you’re done; you don’t have to bother with any of the nonsense,” Faber said.

Barry Guaglardi, an attorney for the estate of the deceased brother and his widow, isn’t sure a buy-sell agreement would have resolved the issues. “If there are other claims beyond what the agreement allows for, that source of funds won’t be the end of the day,” Guaglardi said.

“A buy-sell agreement helps resolve the buyout of one shareholder by another or by the corporation, provided that the two shareholders haven’t violated duties to each other,” Guarglardi said. “It is designed to take the shareholder who passes away and provide a mechanism for the purchase of that shareholder’s interest. The life insurance policy will provide the source of funding under the buy-sell agreement. The buy-sell agreement doesn’t govern a violation of law by the person who is seeking to remain in the company of any rights of the decedent.”

In retrospect, it is impossible to know for sure what the situation would be had the brothers had a buy-sell agreement.

But Eliot Faber believes it would have resulted in a settlement that would have made life easier for everyone.

A BUY-SELL AGREEMENT CAN ENSURE A SMOOTH BUSINESS OWNERSHIP SUCCESSION

A buy-sell agreement is often recommended by business succession specialists to ensure a smooth transition of business ownership. A funding arrangement is also needed to ensure there will be money to fund the buy-sell agreement when the buy-sell event is triggered.

In the sale of a business, a buy-sell clause in a shareholder agreement preserves continuity of ownership in the business and ensures that everyone is fairly treated, the buyer as well as the seller. It is a binding contract between partners or shareholders.

A buy-sell agreement is made up of several legally binding clauses in a business partnership or operating agreement (or it can be a separate agreement that stands on its own) that can control the following business decisions:

- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders);
- What events will trigger a buyout (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company), and;
- What price will be paid for a partner’s or shareholder’s interest in the partnership.

A buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan.

Buy-sell agreements should be drafted by an attorney. Tom Tillery, vice president and chief compliance officer for Paraklete Financial Inc., a financial planner based in Kennesaw, Ga., said the owners should meet periodically to determine if any part of the agreement should change. If no meetings are held, it is assumed that the original arrangement remains in effect.

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