Life After Death

Company board members sign a buy-sell agreement to protect the company's assets in the event that one of them dies.

Tweet

How to protect the finances of your family and your company

The death of Bread Loaf Construction Co. might have come on the night of February 17, 1984, when its founder, Ronald Mainelli, was tragically killed in a car accident. But the company survived. In fact, Bread Loaf, then a $4.5-million general contractor in Middlebury, Vt., was able to hold onto its clients and suppliers, reorganize its management structure, and position itself for a period of intensive growth, culminating in 1989 sales of $30 million.

The secret was the buy-sell agreement Mainelli had put into place a few years before his death. Buy-sells -- legal documents that enable business owners to safeguard their family's financial futures and prepare their companies to live without them -- are the next best thing to immortality. If done well, buy-sells can bolster companies against all kinds of unforeseen events that could threaten their stability and perhaps survival: disability, divorce, death, and plenty of events in between. But few owner-managers have the time or inclination to focus on such painful prospects.

Luckily for Bread Loaf, Mainelli did. He decided to sell Maynard "Mac" McLaughlin and John Leehman 4% stakes each in Bread Loaf for about $3,500 apiece, mainly as a way of keeping two prized employees. Back then, the company was small -- 50 employees -- and Mainelli ran the show while McLaughlin handled estimates and Leeh-man supervised construction sites.

Ironically, Bread Loaf's founder proposed the buy-sell to his new partners mainly to cement his control: "He gave us the stock to keep us happy, but the last thing he wanted if one of us died was to have to deal with the estate of a minority shareholder," explains Leehman. Both men laughed about the agreement, signed it, and never gave it a second thought. "We were all indestructible at that point," McLaughlin recalls dryly. "We saw the buy-sell as something Ron wanted, nothing more."

That initial buy-sell document was short and sweet: it bound the three men to an agreement that if any of them died, his estate would sell his share of stock back to Bread Loaf at a fixed price. Since the company had yet to turn a profit, the stock-purchase price was based on the relatively low book value (then less than $500,000). The buy-back would be paid for by insurance policies held by Bread Loaf on each man's life, pegged to the size of his stock stake.

For four years nobody gave the document a second thought. Then McLaughlin was awakened late one Friday night by a telephone caller telling him the impossible had happened: Mainelli, 42, was dead. McLaughlin came to Leehman's house the next morning. "We just looked at each other and didn't say much," recalls Leehman. "We knew we had our work cut out for us." After spending most of the weekend with Mainelli's family, they returned Monday morning to an office environment that had been transformed, at least for them. "I remember meeting Mac downstairs when he was getting coffee. We just put our arms around each other and said, 'Let's go.' "

Bread Loaf's once-forgotten buy-sell agreement now took on paramount importance as a survival guide. "We called a general meeting of all employees in our conference room that first day and told them that the agreement existed, that John and I would be the owners and managers of the company, and that everything was going to be all right," says McLaughlin. There was no ambiguity or uncertainty, even during those early hours, because Bread Loaf's agreement clearly stated that the Mainelli estate was obligated at the moment of death to sell back all the stock to the corporation, thereby automatically designating McLaughlin and Leehman as sole stockholders and managing partners of the corporation.

The buy-sell also reassured Bread Loaf's customers that the company was going to survive and complete all of its jobs in a timely fashion. Mainelli's death had come at a time when Bread Loaf was involved in some of its biggest jobs ever, including a multimillion-dollar condominium complex. Losing any of these projects could have generated enough negative publicity to deal the company a fatal blow. "We visited every client and prospect together and told them about the buy-sell agreement," recalls Leeh-man. "We also ran an advertisement in the local papers announcing the untimely death of Bread Loaf's owner and the company's ownership-management succession."

Bread Loaf's experience emphasizes the double-edged power of buy-sell agreements. Internally, well-written documents provide a clear transition strategy, which is important during the confusion that follows an owner's death. Externally, they provide bankers, customers, suppliers, investors, and other interested parties with a sense of security whose value cannot be underestimated. At a time when panic or chaos can be fatal to a company's future, buy-sell agreements tell everyone involved that someone is clearly in charge -- someone with management experience and now ownership responsibilities.

Mainelli's buy-sell agreement accomplished all its important goals: the stock sale, management succession, and client relations all went relatively smoothly. But there were a few hitches that could have developed into major problems largely because of the streamlined nature of the document. For one thing, the buy-sell failed to delineate what would happen if there were excess insurance funds once the policy paid for the stock buyback -- which indeed happened, resulting in some difficulties between the company and Mainelli's estate. For another, the agreement did not specify the exact mechanisms for management succession. That can be cause for battle in cases where more than one person is the beneficiary of a buy-sell agreement. Fortunately, McLaughlin and Leehman, who are close friends, were able to work it out smoothly. "Since Mac's about 15 years older than I am, I told him, 'You be the president and I'll be executive VP,' " Leehman says with a laugh; regardless of titles, both men share management responsibilities.

 1 | 2  NEXT 

Read more:

Sign-up for our Small Business Success Newsletter

Email Address: