How might this situation have been averted? This article puts forth one potential approach for avoiding the intricate and long-standing conflicts of the Market Basket drama.
Most small and large partnerships establish buy-and-sell agreements funded with life insurance, called insured repurchase agreements. They are of particular importance in eliminating or minimizing disruption in the partnership’s business in the event of the death of one partner. Through the instrument of the agreement, businesses buy back shares of the business from the heirs of the deceased partner; the funds to accomplish this come from the insurance policy covering the life of the late partner.
Why are such re-purchase agreements needed? They provide for the security and stability of the business by outlining a buy-back procedure in the event that any partner passes away. Insurance policies create instant liquidity with which to buy back company stock from heirs. It’s a win-win situation in most cases, with the business continuing solidly as before and the heirs receiving a fair benefit. The procedure is commonplace in the business world and provides for minimal disruption of the business.
What happens without a formal repurchase agreement? The company usually lacks liquidity to buy back stock from the heirs of a deceased partner. Without such an agreement, the heirs of the deceased partner take over their ownership position. The heirs may not have the experience to assume leadership, creating significant potentials for conflict. Without this type of agreement, there is no pre-established mechanism for valuation and buy-out of an ownership position. The remaining partner or partners may be “stuck” with others in trying to move forward, to the detriment of the business.
How does the re-purchase agreement work? Partners draw up legal agreements for stock repurchase in the event of a death, financed by life insurance policies, with the business as beneficiary of the policies. The resulting benefit furnishes the liquidity necessary to buy back shares from heirs. Part of the re-purchase agreement establishes a means for periodically valuing the business. Premiums for these policies are paid by the business. Rates are based on gender, age, health, and duration of policy period.
Typically the partnership would develop a close working relationship with a certified, local, well-respected life insurance professional to set up the Insured Stock Re-purchase Agreement. The attorney of the business plays a key role in drawing up the agreement and works closely with the professional insurance representative and the partners to schedule at least one meeting annually to establish valuation of the company. Minutes or tapings of the meetings properly record the valuation of the company, with appropriate increases in the amounts of life insurance to cover the buy-back stock plan as the business valuation also rises. Valuation may depend on sales, increase or decrease of net worth, or new products, among other factors.
During the years of my active business career, this sort of agreement was commonplace and successfully implemented by me on numerous occasions. So, I can testify that it works. And because it works it’s a necessity in today’s environment of complex relationships and agreements. Any partnership consists in reality of more than the legal partners: there are wives, husbands, children, grandchildren, grandparents, in-laws, and other relatives who often complicate partnerships with divorces, illnesses and deaths. This type of business agreement ensures smooth transitions and stability for businesses and the heirs of partnerships.
For more information about Mr. Papoutsy, his schedule of free lectures, or to read his other articles on corporate social responsibility, business ethics and sustainability, visit the About Us section of Hellenic Communication Service at http://www.helleniccomserve.com/aboutus.html, or the webpages of the site dedicated to the Christos and Mary Papoutsy Distinguished Chair in ethics at Southern New Hampshire University at http://www.snhu.edu/papoutsy.html. Mr. Papoutsy welcomes comments and can be reached at email@example.com.