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76 July 2014 | beautystorebusiness.com (1) When one family member got a divorce, half of his stock went to an ex- spouse with no business experience. To avoid a destructive addition to the man- agement team the business had to buy out the ex-spouse—at a significantly higher price than the stock's value. (2) Shareholder siblings had such major dis- agreements that the business could not move forward and as a result had to be liquidated. (3) Three of four shareholder siblings wanted to borrow $500,000 to make business improvements. One shareholder balked at signing for the loan so his stock had to be purchased by the other three—resulting in an expen- sive restructure of the strategic plan. SAVE OR SPEND? Conflicts often arise over financial strate- gies that impact individual pocketbooks. "Very often there is a tension between 'savers' and 'spenders' in a family," explains Schwerzler. "That tension often forms the basis for disagreements on how the busi- ness should be run." All such conflicts get bigger and scarier as the family gets larger. "Once you have a sibling partner- ship, things start getting complex," says Schwerzler. "And a consortium of cousins gets very complex." Domestic battles often escalate and end up destroying the enterprise. It's little wonder that the family business survival rate could bear some improve- ment. "Statistics show that about 30% of family businesses make it to the second generation," says Schwerzler. "About 12% make it to the third genera- tion, and only 3% to 4% to the fourth." BE PREPARED How can your own family business stay out of trouble—or at least minimize the damage when a disruptive event occurs? Consultants recommend drawing up what is called a buy/sell agreement. Also referred to as a buyout agreement, this document governs any situation that results from the death or departure of one of the organization's stockholders. Among the questions answered by the buy/sell agreement are these: What events will trigger a stock buyout? Who has the right to purchase the stock of a departing owner? How will the stock be valued? What mechanism will be used to resolve disputes between family members? Trying to answer such questions when a disruptive event hits is a recipe for disaster. The fraught emotions character- istic of such times can play a destructive role. "If you are trying to hammer out a buy/sell agreement while there is turmoil in relationships, you are working in a con- text which is not ideal," says Kimberly M. Hanlon (khanlonlaw.com), a Minneapolis- based attorney active in business and estate-planning matters. The challenge is especially acute for a business under- going diminished profitability—the very condition that can often catalyze family members to cash out. "When a business starts to go downhill, family relation- ships often go downhill too," says Hanlon. "People start blaming each other and it all goes south." The moral is clear: Smart family busi- nesses plan ahead. "Think about the terms of a buy/sell agreement while relationships are still good among family members," says Hanlon. "People who are levelheaded and thinking clearly tend to come up with fair and reason- able terms." TERMS OF ENDEARMENT Maybe you already have a buy/sell agreement in place that you want to improve, or maybe you are ready to cre- ate one for the first time. In either case here's some help in the form of the most common questions such a document should answer. 1 . Who has the right of first refusal on a departing owner's stock? In other words, what entity has the right to purchase the shares of a family member who dies, or who just wants to cash out? The answer—depending on the advice of your accountant and attorney—might be the other family business owners or the business itself. The idea here is to keep those shares from falling into the hands of outsiders who might lack operating expertise or who might not have the best interests of your busi- ness at heart. Your document should also address the disposition of a family salonskins.com 1 . 8 0 0 . 6 8 5 . 2 8 1 7 Patent Pending Moisturizer Locking Material Keeps Feet Warm and Clean Patented Technology No Need for Toe Separators g y 1.800.685.2817 pedisavers.com ™ Perfect Pedicure Socks Visit us at: COSMOPROF Booth No:D15172 Visit us at: COSMOPROF Booth No:D15172 Don't get caught naked. THE OFFICIAL BARBICIDE ® JAR WRAP B u y / S e l l A g r e e m e n t s W h a t Y o u S h o u l d K n o w . i n d d 7 6 Buy/Sell Agreements What You Should Know.indd 76 6 / 3 / 1 4 4 : 4 8 P M 6/3/14 4:48 PM